All trading basics

Working Capital Ratio (Current Ratio)

Working Capital Ratio (Current Ratio) = Current Assets ÷ Current Liabilities

Indicates if a firm has enough short-term assets to cover its immediate liabilities.

Things to remember

  • If the ratio is less than one then the company has negative working capital.
  • A high working capital ratio isn't always a good thing, it could indicate that a company has too much inventory or they are not investing their excess cash.
Balance Sheet

For Cory's Tequila Co.: $4,615 ÷ $3,003 = 1.54

This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient, Cory's Tequila Co. seems to be comfortably in this area.

If you wanted to take this ratio a step further then you could try the Acid Test/Quick Ratio, a more strenuous version of the W/C, indicating whether liabilities could be paid without selling inventory.