Working Capital Ratio

Measures short-term financial health.

Working Capital Ratio

Measures short-term financial health.

Working Capital Ratio

Measures short-term financial health.

Formula

Working Capital Ratio = Current Assets / Current Liabilities

Know your metric

Importance of

Working Capital Ratio

  1. 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.


  1. 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.


  1. 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

  1. Can Be Misleading

A very high working capital ratio might indicate excessive idle resources, which could be better utilized to generate returns.


  1. 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.


  1. 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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