What is the working capital ratio?
The working capital ratio is a financial calculation designed to measure the company's financial strength in the short term. This ratio, also known as the current ratio, is calculated by taking over the sum of the company's assets and their distribution of the obligation that the company currently owes. The negative relationship of working capital is problematic, because it means that if the company was forced to repay all its obligations immediately, it could not do so or had no money for everyday operation. The standard for a good ratio depends on the circumstances of the business and the volatility of the industry that the store lives. A better measurement of fiscal force is how much capital the company must cover possible losses and growth of business through investment. The working capital ratio is a good indicator of such financing IAL and provides the closest picture of the money that the company has at a time when the ratio is calculated.
As an example, imagine that a company A has a total of $ 1,000 in the US (USD) in assets that can take the form of cash, shares, stocks or account receivables. This company also collected $ 800 obligations, which usually take the form of payable accounts. By distributing $ 1,000 USD $ 800, a working capital ratio of 1,25 is achieved.
The company that shows the trend of the direction of the descending capital proportion should trigger the red flag to investors, as this is a sign that the company may not be fiscal and may be bankruptcy. In addition, the company can also analyze its own ratio as a way to find out any problems with the effectiveness it could have. For example, a company that reports good profits with a low current ratio can be sufficiently good work in collecting payments.
It is also worth noting that too high working capital ratio is not necessarily a good sign for society. That could actually get zerAmenat that the company does not use enough redundant capital for investment opportunities. In the same lines, sometimes a low ratio is not a desperate feature, especially for a newer company that can have more investment from its capital than a long -term company. The standard for a good current ratio also depends on which industry serves. Businesses in volatile industries require a higher amount of capital for sudden decreases of sales than businesses in a more stable industry.