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Working Capital Ratio Formula:
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The Working Capital Ratio (WCR), also known as the Current Ratio, is a liquidity ratio that measures a company's ability to pay off its short-term liabilities with its short-term assets. It provides insight into the financial health and short-term liquidity position of a business.
The calculator uses the Working Capital Ratio formula:
Where:
Explanation: The ratio indicates how many times a company can cover its current liabilities using only its current assets. A higher ratio suggests better short-term financial health.
Details: The Working Capital Ratio is crucial for assessing a company's liquidity position, creditworthiness, and ability to meet short-term obligations. It helps investors, creditors, and management evaluate financial stability and operational efficiency.
Tips: Enter current assets and current liabilities in the same currency unit. Both values must be positive numbers greater than zero for accurate calculation.
Q1: What is a good Working Capital Ratio?
A: Generally, a ratio between 1.5 and 2.0 is considered healthy. Below 1.0 may indicate liquidity problems, while above 3.0 may suggest inefficient use of assets.
Q2: How does WCR differ from Quick Ratio?
A: Quick Ratio excludes inventory from current assets, providing a more conservative measure of liquidity. WCR includes all current assets.
Q3: What are considered current assets?
A: Current assets include cash, accounts receivable, inventory, marketable securities, and other assets expected to be converted to cash within one year.
Q4: What are considered current liabilities?
A: Current liabilities include accounts payable, short-term debt, accrued expenses, and other obligations due within one year.
Q5: Can WCR be too high?
A: Yes, a very high ratio may indicate that the company is not using its current assets efficiently to generate revenue and growth.