Working capital Ratio : Meaning, Formula and Example

The working capital is the money that a company has for day-to-day operations. The working capital ratio indicates whether the company has enough short-term assets (current assets) to cover its short-term liabilities (current liabilities) and thus leave the company with working capital to support its current operations. A ratio below 1 is an indication of negative working capital, meaning that the company will most likely not be able to cover its current short-term obligations.

Working capital is defined as current assets less current liabilities.

Formula for Working capital Ratio

\[Working\,capital\,ratio = \frac{{Current\,assests}}{{Current\,liablities}}\]

Working capital = Current assets – Current liabilities

Example

Jet Airways has current assets of Rs.78,655 and current liabilities of Rs.98,800. This provides the company with a working capital ratio of 0.79.

Working capital = 78,655 – 98,800 = -20145

This means that the company is short of covering its short-term liabilities almost 0.21 (1-0.79) times with its short-term assets. Hence Jet Airways have a hurdle in working capital so they need to get funding from lenders.

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