What is the working capital ratio and why is it important?
An example of an AI chatbot conversation about the working capital ratio and its significance in finance.
What is the working capital ratio and why is it important?
The working capital ratio measures a company's short-term liquidity by comparing current assets to current liabilities. It's important because it indicates whether a company can cover its short-term obligations.
How do you calculate the working capital ratio?
You calculate it by dividing current assets by current liabilities. The formula is: Working Capital Ratio = Current Assets / Current Liabilities.
What does a working capital ratio of less than 1 mean?
A working capital ratio of less than 1 indicates that a company may have liquidity issues, as it has more current liabilities than current assets.
What is considered a healthy working capital ratio?
A healthy working capital ratio typically ranges from 1.2 to 2.0, suggesting that a company can comfortably meet its short-term obligations.
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