1. What is Working Capital Ratio?

The Working Capital Ratio (also called Current Ratio) measures a company's ability to pay off its short-term liabilities with its short-term assets. It's a key indicator of financial health and liquidity.

2. How Does the Calculator Work?

The calculator uses the Working Capital Ratio formula:

Where:

• Current Assets — Cash and other assets expected to be converted to cash within one year
• Current Liabilities — Debts and obligations due within one year

Explanation: A ratio above 1 indicates the company has more current assets than current liabilities, while a ratio below 1 suggests potential liquidity issues.

3. Importance of Working Capital Ratio

Details: This ratio is crucial for assessing a company's short-term financial health, ability to meet obligations, and operational efficiency. Creditors and investors closely monitor this metric.

4. Using the Calculator

Tips: Enter current assets and current liabilities in dollars. Both values must be positive numbers. The calculator will compute the ratio of assets to liabilities.

5. Frequently Asked Questions (FAQ)

Q1: What is a good working capital ratio?
A: Generally, a ratio between 1.2 and 2.0 is considered healthy. Too high may indicate inefficient asset use, while too low suggests liquidity risk.

Q2: How does this differ from quick ratio?
A: Quick ratio excludes inventory from current assets, providing a more conservative measure of liquidity.

Q3: Can the ratio be too high?
A: Yes, an excessively high ratio may indicate the company isn't effectively using its short-term assets.

Q4: How often should this be calculated?
A: Businesses should monitor this ratio regularly, typically quarterly or monthly, depending on their cash flow needs.

Q5: Does industry affect the ideal ratio?
A: Yes, optimal ratios vary by industry due to different business models and operating cycles.