Working capital ratio

Working Capital Ratio

Another term for the current ratio, a liquidity metric that assesses a company’s ability to meet short-term obligations by comparing current assets to current liabilities.

For instance, a manufacturing company with $5 million in current assets (cash, accounts receivable, inventory, prepaid expenses) and $3 million in current liabilities (accounts payable, short-term debt, accrued expenses) would have a working capital ratio of 1.67, suggesting adequate short-term liquidity.

The working capital ratio provides a basic assessment of whether a company can cover its short-term obligations with its short-term resources. A ratio above 1.0 indicates positive working capital (more current assets than current liabilities), generally considered favorable for operational flexibility. However, excessively high ratios might suggest inefficient use of assets. Optimal levels vary by industry, with capital-intensive businesses typically maintaining lower ratios than service companies. While useful as a quick liquidity measure, this ratio doesn’t consider the quality or liquidity of specific current assets or the timing of obligations within the one-year horizon.