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Working Capital Ratio
Written by Kenny Foo   
Monday, 02 March 2009 16:36

Investment Formula Description

Working Capital Ratio is an liquidity formula to reflect the ability of a corporation to return short term debt obligations by using its current assets.

Similar with working capital which involves of current liabilities and current assets, working capital ratio is used to measure liquidity of a corporation to pay off its current liabilities ( debt and payables ) with its current assets(cash, inventory, receivables) . Hence, it is sometimes referred as current ratio, liquidity ratio, cash asset ratio or even cash ratio.The higher the working capital ratio, the better the ability of the corporation to pay off its short-term debts. However, a high working capital ratio is not always a good indicator too because it could mean the corporation has too much inventories or the corporation is not investing the money on better options. Working capital ratio is best compare with companies in same industries to have more accurate outcome. If a corporation has working capital ratio less than 1, it means that this corporation will have negative working capital. Besides, there is another liquidity formula that is more conservative than current ratio. It is named as quick ratio or acid test ratio.

 

Investment Formula

Working capital ratio  = Current Assets / Current Liabilities

Investment Formula Example

If Corporation OPQ has total $ 1,500,000 of current assets and $1,000,000 of current liabilities,
Working capital Ratio = Current Assets / Current Liabilities = 1,500,000 / 1,000,000 = 1.5.

Corporation OPQ has 1.5 times of working capital ratio. Corporation OPQ is able to return all its short-term debts at any point of time.

Working capital  =  Current Assets - Current Liabilities = 1,500,000 - 1,000,000 = 500,000
Corporation OPQ has more than 1  working capital ratio. Hence, corporation OPQ has positive working capital.



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Last Updated ( Monday, 30 March 2009 20:07 )
 
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