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 provides insight into the financial health and liquidity position of a business.

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 only its current assets.

3. Importance of Working Capital Ratio

Details: This ratio is crucial for assessing a company's short-term financial stability. It helps creditors, investors, and management evaluate the company's ability to meet its short-term obligations and maintain operations.

4. Using the Calculator

Tips: Enter current assets and current liabilities in USD. Both values must be positive numbers greater than zero for accurate calculation.

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 may indicate liquidity problems, while above 2.0 might suggest inefficient use of current assets.

Q2: How does Working Capital Ratio differ from Quick Ratio?
A: The Quick Ratio (Acid-Test Ratio) excludes inventory from current assets, providing a more conservative measure of liquidity.

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 regularly, typically quarterly or annually, to track changes in the company's financial health over time.

Q5: Does industry affect the ideal ratio?
A: Yes, different industries have different working capital requirements. Retail businesses typically need higher ratios than service-based companies.