1. What is the Working Capital Ratio?

The Working Capital Ratio, also known as the Current Ratio, measures a company's ability to pay off its short-term liabilities with its short-term assets. It is a key indicator of a company's short-term financial health and liquidity position.

2. How Does the Calculator Work?

The calculator uses the Working Capital Ratio formula:

Where:

• \( \text{Current Assets} \) — Assets expected to be converted to cash within one year (cash, accounts receivable, inventory, etc.)
• \( \text{Current Liabilities} \) — Obligations due within one year (accounts payable, short-term debt, accrued expenses, etc.)

Explanation: The ratio indicates how many times a company can cover its current liabilities using its current assets. A higher ratio suggests better short-term financial health.

3. Importance of Working Capital Ratio

Details: This ratio is crucial for assessing a company's liquidity position, creditworthiness, and operational efficiency. It helps investors, creditors, and management evaluate the company's ability to meet short-term obligations without raising external capital.

4. Using the Calculator

Tips: Enter current assets and current liabilities in USD. Both values must be positive numbers greater than zero. The result is expressed as a dimensionless ratio.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Working Capital Ratio?
A: Generally, a ratio between 1.5 and 2.0 is considered healthy. Below 1.0 indicates potential liquidity issues, while above 3.0 may suggest inefficient use of assets.

Q2: How does Working Capital Ratio differ from Quick Ratio?
A: Quick Ratio excludes inventory from current assets, providing a more conservative measure of liquidity. Working Capital Ratio includes all current assets.

Q3: Can the ratio 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.

Q4: How often should this ratio be calculated?
A: It should be monitored quarterly or annually as part of regular financial analysis to track changes in liquidity position over time.

Q5: What factors can affect the Working Capital Ratio?
A: Seasonal fluctuations, business cycles, inventory management, credit policies, and payment terms with suppliers and customers can all impact this ratio.