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Working Capital to Current Assets Ratio

Working Capital to Current Assets Ratio - a financial sustainability ratio indicating the ability of a company to finance its current assets with its working capital. It can be computed by dividing the company’s working capital by its current assets.

Normative for the working capital to current assets ratio is the value of 0.1 and higher. A high value indicates a good level of financial sustainability and ability to actively operate even in the absence of access to the short-term loan capital and external source of finance. And vice versa, low ratio values witness a significant financial dependence from creditors’ funds. With the possible deterioration of the market situation, the company will not be able to continue working. A negative value of this ratio means that the equity and long-term sources of finance are fully directed towards financing the noncurrent assets, and the company does not have any long-term funds to finance its working capital.

Resolving the problems with the working capital to current assets ratio exceeding the normative range:

To increase the value of this indicator a company can optimize the structure of its current and noncurrent assets, involve some extra funds of the firm’s owners, change the current dividend policy, reinvest the profit in the company, etc.

Formula(s):

Working Capital to Current Assets Ratio = Working Capital ÷ Current Assets

Example:

Company A

Balance Sheet

$

as of

31/12/YEAR1

$

as of

31/12/YEAR2

Assets
I. NONCURRENT ASSETS
TOTAL 670 669
II. CURRENT ASSETS
TOTAL 532 475
Balance 1202 1144
Liabilities
III. STOCKHOLDERS' EQUITY
TOTAL 645 744
IV. LONG-TERM LIABILITIES
TOTAL 100 100
V. SHORT-TERM LIABILITIES
TOTAL 457 300
Balance 1202 1144

Working Capital to Current Assets Ratio (Year 1) = (645+100-670) ÷ 532 = 0,14

Working Capital to Current Assets Ratio (Year 2) = (744+100-669) ÷ 475 = 0,37

Financial sustainability of the company was increasing over the analyzed period since the working capital to current assets ratio has grown from 0.14 in year 1 to 0.37 in year 2. At the end of the analyzed period, the company was able to finance 37% of its current assets with the stockholders' equity and long-term sources of finance. This indicates low dependence on the loan capital.

Conclusion:

Summing up everything said, the lower the dependence on the loan capital, the more financially sustainable the company is. If it is able to finance a big part of its current assets with its working capital, it is more likely to meet its long-term obligations.

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