The working capital ratio, also called the current ratio, divides current assets by current liabilities to show whether the business has enough short-term resources to cover its short-term obligations.
A ratio above 1.0 means current assets exceed current liabilities, and the business can meet its near-term obligations from existing resources. A ratio below 1.0 means it cannot, at least not without drawing on additional credit or converting longer-term assets. Most lenders require a minimum working capital ratio as a financial covenant, and the specific threshold varies by industry and lender risk appetite.
The ratio is a snapshot, not a movie. A business with a comfortable working capital ratio today can find itself constrained next period if a large receivable does not collect on time or a significant obligation falls due. Reading the ratio alongside the cash flow forecast and the receivables aging provides a more complete picture of near-term liquidity than the balance sheet number alone.
See also: Working Capital · Debt Covenants · Cash Conversion CycleThe working capital ratio is a useful starting point. Understanding what drives it is where the real insight lives. See how Wefinx approaches Virtual CFO services.