What is the formula for the Working Capital Ratio?

What is the formula for the Working Capital Ratio?

• A. Current assets divided by current liabilities
• B. Current liabilities divided by current assets
• C. Net income divided by revenue
• D. Revenue divided by expenses

Answer: (A)

Liquidity is the focus here: it shows how well a company can cover its short-term obligations with its short-term assets. The Working Capital Ratio is calculated as current assets divided by current liabilities. This tells you how many dollars of assets exist for each dollar of liabilities due soon. A result greater than 1 indicates positive short-term liquidity, meaning assets exceed obligations; a result below 1 signals potential liquidity problems. In practice, a ratio around 1.5 to 2.0 is often seen as a comfortable cushion, though targets vary by industry. For example, if current assets are 500,000 and current liabilities are 250,000, the ratio is 2.0, meaning there are twice as many current assets as current liabilities. The other formulas describe different concepts: the inverse would be current liabilities divided by current assets, and net income divided by revenue or revenue divided by expenses relate to profitability, not liquidity.

Liquidity is the focus here: it shows how well a company can cover its short-term obligations with its short-term assets. The Working Capital Ratio is calculated as current assets divided by current liabilities. This tells you how many dollars of assets exist for each dollar of liabilities due soon. A result greater than 1 indicates positive short-term liquidity, meaning assets exceed obligations; a result below 1 signals potential liquidity problems. In practice, a ratio around 1.5 to 2.0 is often seen as a comfortable cushion, though targets vary by industry. For example, if current assets are 500,000 and current liabilities are 250,000, the ratio is 2.0, meaning there are twice as many current assets as current liabilities. The other formulas describe different concepts: the inverse would be current liabilities divided by current assets, and net income divided by revenue or revenue divided by expenses relate to profitability, not liquidity.