Working Capital Ratio Calculator Formula
Understand the math behind the working capital ratio calculator. Each variable explained with a worked example.
Formulas Used
Working Capital
working_capital = current_assets - current_liabilitiesWorking Capital Ratio
wc_ratio = current_liabilities > 0 ? current_assets / current_liabilities : 0Working Capital as % of Revenue
wc_to_revenue = annual_revenue > 0 ? ((current_assets - current_liabilities) / annual_revenue) * 100 : 0Variables
| Variable | Description | Default |
|---|---|---|
current_assets | Total Current Assets(USD) | 450000 |
current_liabilities | Total Current Liabilities(USD) | 300000 |
annual_revenue | Annual Revenue(USD) | 2000000 |
How It Works
How to Calculate Working Capital
Formula
Working Capital = Current Assets - Current Liabilities Working Capital Ratio = Current Assets / Current Liabilities
Working capital represents the operational liquidity available to run day-to-day business activities. Positive working capital means you have a buffer; negative working capital means short-term debts exceed short-term assets. Measuring working capital as a percentage of revenue helps you compare across different-sized businesses.
Worked Example
A company has $450,000 in current assets, $300,000 in current liabilities, and $2,000,000 in annual revenue.
- 01Working Capital = $450,000 - $300,000 = $150,000
- 02Working Capital Ratio = $450,000 / $300,000 = 1.50
- 03WC as % of Revenue = $150,000 / $2,000,000 x 100 = 7.5%
Frequently Asked Questions
Can a profitable company have negative working capital?
Yes. Fast-growing companies sometimes have negative working capital because they invest heavily in growth. Some businesses like grocery stores operate with negative working capital because they collect cash quickly but pay suppliers on extended terms.
How much working capital is enough?
It depends on the business cycle. Companies with stable, predictable revenue need less working capital. Seasonal businesses may need more to bridge off-peak periods. Aim for a working capital ratio of 1.2-2.0.
Learn More
Guide
Cash Flow Analysis Guide
Learn how to analyze cash flow for your business. Understand operating, investing, and financing cash flows, and why profitable companies can still run out of cash.
Ready to run the numbers?
Open Working Capital Ratio Calculator