Chartered Financial Analyst (CFA) Level 1 Practice Exam

What does Working Capital Turnover measure?

1. Efficiency of using current assets

2. Revenue generated per average working capital

3. Cost of goods sold per average current liabilities

4. Value of fixed assets against total sales

The correct answer is: Revenue generated per average working capital

Working Capital Turnover is a financial metric that assesses how effectively a company utilizes its working capital to generate revenue. The formulation of this ratio is typically defined as the revenue generated divided by the average working capital. This calculation provides insight into the efficiency of a company's operations by highlighting how well it turns its working capital into sales. By focusing on revenue generation relative to the level of working capital employed, this measure indicates how proficiently a business is in managing its short-term assets and liabilities to facilitate business operations and support sales volume. An increasing turnover ratio is generally viewed positively, as it suggests that a company is improving its utilization of working capital and boosting operational efficiency. Other options relate to different measures. For instance, measuring just the efficiency of using current assets does not capture the relationship between these assets and the broader concept of working capital, which includes current liabilities as well. Similarly, the cost of goods sold in relation to average current liabilities or the value of fixed assets versus total sales are metrics that focus on distinct aspects of a company’s financial health but do not encapsulate the core intent of Working Capital Turnover, which is specifically about the revenue generated per average working capital.