Working Capital Turnover
Working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital. Working capital is defined as the amount by which current assets exceed current liabilities.
A higher working capital turnover ratio is better. It means that the company is utilizing its working capital more efficiently i.e. generating more revenue using less investment.
Formula
| Working Capital Turnover Ratio | |
| = | Revenue |
| Average Working Capital | |
Working Capital = Current Assets − Current Liabilities
| Average Working Capital | |
| = | Opening Working Capital + Closing Working Capital |
| 2 | |
Example
Calculate and analyze the working capital turnover ratios of General Electric (NYSE: GE), United Technologies Corporation (NYSE: UTX) and Amazon Inc. (NYSE: AMZN) for financial year 2012. Relevant extracts from their financial statements are given below. All amounts are in USD in million.
| GE | UTX | AMZN | |
|---|---|---|---|
| Revenue | 147,359 | 57,708 | 70133 |
| Current Assets | 428,729 | 29,610 | 21296 |
| Current Liabilities | 221,403 | 23,786 | 19002 |
Solution
The following schedule contains the required calculations:
| GE | UTX | AMZN | |
|---|---|---|---|
| Revenue (A) | 147,359 | 57,708 | 70,133 |
| Current Assets (B) | 428,729 | 29,610 | 21,296 |
| Current Liabilities (C) | 221,403 | 23,786 | 19,002 |
| Working capital (D)[= B − C] | 207,326 | 5,824 | 2,294 |
| Working capital turnover (A ÷ D) | 0.71 | 9.91 | 30.57 |
Since GE and UTX are competitors, working capital turnover ratio can be used to compare their asset utilization. UTX is clearly using its investment in working capital more efficiently as indicated by its higher working capital turnover ratio when compared to GE's ratio.
AMZN on the other hand is not a competitor of GE or UTX so comparison between GE/UTX and AMZN based on working capital turnover ratio is not appropriate.
Further, AMZN's industry and its market position is such that it can maintain very low working capital. In such a situation working capital turnover ratio is not very useful. Fixed asset turnover and total asset turnover ratio should be used in such scenarios.
by Obaidullah Jan, ACA, CFA and last modified on