Formula
Working Capital Ratio = Current Assets / Current Liabilities
Know your metric
Importance of
Working Capital Ratio
Liquidity Measure
The Working Capital Ratio is a critical indicator of a company's short-term liquidity, measuring its ability to cover short-term liabilities with short-term assets.
Financial Health Insight
A healthy working capital ratio suggests good financial health and operational efficiency, showing that the company can easily meet its current obligations.
Risk Assessment Tool
This ratio is often used by creditors and investors to assess the risk level of investing or lending to a business.
Drawbacks of
Working Capital Ratio
Can Be Misleading
A very high working capital ratio might indicate excessive idle resources, which could be better utilized to generate returns.
Not Reflective of Long-Term Health
This ratio only provides a snapshot of short-term financial health and doesn't reflect long-term financial stability or profitability.
Influenced by Seasonal Factors
The working capital ratio can be significantly influenced by seasonal fluctuations in a company's operations, which might distort the actual liquidity position.
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