Working Capital ratio

A printable cheatsheet with calculations
and notes

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Working Capital ratio

Working Capital Ratio =

Current assets

Current liabilities

AKA: Current Ratio

INTERPRETATION

The working capital ratio evaluates the liquidity or ability to meet short-term debts. It measures a company’s ability to pay off its current liabilities with current assets.

Business owners, managers, and other interested parties use it to measure a company’s basic financial solvency.

Note: expanded calculation

Divide current assets by current liabilities.

EXAMPLE

M&M had $100,000 of current assets and $125,000 of current liabilities.

WCR = $100,000/ $125000 = .80

M&M’s working capital is less than 1, which would be considered risky to creditors. A ratio of 1 is usually considered the middle ground. It’s not risky, but it is also not very safe.

BENCHMARK: HA, PG, EB, ROT

To get a more accurate idea of how financially healthy a company is, comparing its working capital ratio with those of similar companies is helpful. Generally, A working capital ratio between 1.5 and 2 is a good indicator of adequate liquidity.

A ratio of 1 is usually considered the middle ground. It’s not risky, but it is also not very safe.

And below 1.0, the company is in risky territory, known as negative working capital. With more liabilities than assets, it would have to sell current assets to pay off its liabilities.

Working Capital ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.