Working capital turnover measures how well a business generates net sales revenue for every dollar of working capital on its balance sheet. Higher ratios are generally better because the company has larger sales numbers relative to its working capital.
The working capital turnover ratio is as follows:
Working Capital Turnover = Net Annual Sales / Average Working Capital
Average working capital means the excess of your company’s average current assets over average current liabilities. If current liabilities exceed current assets, then your working capital is negative.
Working Capital = Average Current Assets – Average Current Liabilities
Current assets may consist of cash, cash equivalents, accounts receivable, deposits, prepaid expenses, and inventory. Current liabilities may include accounts payable, deferred revenue, the current portion of long-term debts, and other liabilities due within 1 year.