What Is the Net Working Capital Ratio?

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working capital ratio

The opposite is true for companies with negative working capital, who may need to seek financing, such as by taking on debt or selling stock, or declare bankruptcy. In understanding whether a company or sector will have higher working capital needs, it’s useful to look at the business model and operating cycle. Effectively, this ratio looks at how easily a company can turn its accounts receivable into cash. The basic idea is to have enough cash or cash-like assets — that is, those that can be converted into cash in fewer than 12 months — to cover any short-term liabilities. This means the company has $150,000 available, indicating it has the ability to fund its short-term obligations. It’s also part of a business strategy called working capital management, which employs three ratios to ensure a good balance between staying liquid and using resources efficiently.

working capital ratio

Working capital is a number that’s useful for both companies and investors to know, as it shows whether or not a company is liquid. Below is an overview of working capital including how to calculate it, how it’s used, working capital management and its ratios, and the factors that affect working capital. Though you want your working capital ratio to be a 1.0 or more,