Definition of Working Capital Ratio
The working capital ratio is defined as the amount of a company’s current assets divided by the amount of its current liabilities. Hence, the working capital ratio is the same as the current ratio.
The working capital ratio (or current ratio) is one indicator of a company’s ability to pay its current obligations.
Example of Working Capital Ratio
If a company has $600,000 of current assets and has $400,000 of current liabilities, its working capital ratio is $600,000 divided by $400,000 = 1.5 or 1.5 to 1.
Whether this ratio is good or bad, sufficient or insufficient, etc. depends on many factors including the composition of the company’s current assets, the speed at which the company’s sales turn into cash, the credit terms of its suppliers, the company’s long-term investments (if any), the amount of its long-term debt, competitors’ credit terms, the company’s profitability, etc.
