Chartered Financial Analyst (CFA) Level 1 Practice Exam

What is the main focus of the working capital turnover ratio?

1. Inventory management efficiency

2. Operating profitability

3. Revenue generation relative to working capital

4. Short-term liquidity

The correct answer is: Revenue generation relative to working capital

The working capital turnover ratio primarily assesses how efficiently a company utilizes its working capital to generate revenue. It measures the relationship between a firm’s sales and its working capital, indicating how effectively a business is using its short-term assets and liabilities to produce sales. A higher ratio suggests that a company is generating more revenue per dollar of working capital, which reflects efficient management of resources. While options such as inventory management efficiency, operating profitability, and short-term liquidity are important aspects of overall financial health, they do not capture the specific relationship that the working capital turnover ratio addresses. For instance, inventory management focuses on the handling of a company’s inventory levels, operating profitability centers around the company’s overall profit margins from operations, and short-term liquidity pertains to a firm's ability to meet its short-term obligations. These factors are influenced by working capital but do not define the purpose of the working capital turnover ratio itself, which is centered on revenue generation relative to working capital.