Working capital is the amount of cash and other assets a business has available after all its current liabilities are accounted for. It is one of six main calculations used to determine short-term liquidity—the ability of a company to pay its bills as they come due.
As a dollar figure, working capital is calculated as follows:
Working capital = current assets—current liabilities
Companies can also calculate their working capital ratio, which shows how much working capital is available for every dollar of current liabilities:
Working capital ratio = (current assets / current liabilities)
Most companies aim for a working capital ratio of between $1.50 and $1.75 for each $1 of current liabilities, although what constitutes a “healthy” ratio varies by industry.
More about working capital
Using figures from the balance sheet excerpt below, ABC Co.’s working capital and working capital ratio would be:
Working capital = $120,000—$70,000 = $50,000
Working capital ratio = $120,000 / $70.000 = 1.7 (rounded)
With $1.70 for every $1 of current liabilities, ABC Co. has a healthy working capital ratio for its industry.
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