Wednesday, September 30

Working Capital Ratio

What is Working Capital?

Definition: The working capital ratio, also known as the current ratio, is a liquidity ratio that steps a company’s capability to repay its current liabilities with current shares. The working capital ratio is valuable to creditors since it reveals that the liquidity of the provider.

Current liabilities are paid with present shares such as cash, cash equivalents, and marketable securities since these shares could be transformed into money many faster than secured assets. The quicker the shares could be converted into money, the more likely that the business is going to have the money punctually to cover its own debts.

The comprehension that this ratio is known as the operating capital ratio stems in the working capital. When existing shares exceed current liabilities, the company has sufficient funds to conduct its daily operations. To put it differently, it’s sufficient funds to get the job done. The working capital ratio transforms the operating capital calculation to a contrast medially current shares and current liabilities.

Formula

The working capital ratio is calculated by dividing current shares by current liabilities.

Working Capital Ratio