What does the Working Capital Ratio assess?

What does the Working Capital Ratio assess?

• A. Do you have enough short term assets to cover immediate liabilities
• B. Profitability over the fiscal year
• C. Long-term solvency
• D. Inventory turnover rate

Answer: (A)

The Working Capital Ratio is a liquidity indicator that shows whether a company has enough short-term assets to cover its short-term obligations. It’s calculated by dividing current assets by current liabilities. If the ratio is above 1, there are more current assets than liabilities due soon, suggesting the company can meet its near-term obligations. If it’s below 1, there may be liquidity concerns. This focuses on immediate financial health, not on profitability or long-term solvency, and it isn’t about how quickly inventory turns over.

The Working Capital Ratio is a liquidity indicator that shows whether a company has enough short-term assets to cover its short-term obligations. It’s calculated by dividing current assets by current liabilities. If the ratio is above 1, there are more current assets than liabilities due soon, suggesting the company can meet its near-term obligations. If it’s below 1, there may be liquidity concerns. This focuses on immediate financial health, not on profitability or long-term solvency, and it isn’t about how quickly inventory turns over.