Financial Ratios Part 2 of 21: Working Capital
The Working Capital Ratio, how much do you have to work with?
Financial Ratios can assist in determining the health of a business. There is a minimum of 21 different ratios that can be looked at by many financial institutions. You cannot look at a single ratio and determine the overall health of a business or farming operation. Multiple ratios must be used along with other information to determine the total and overall health of a farming operation and business. This series of articles will look at 21 commonly used ratios.
The Working Capital Ratio is a measure of liquidity and is determined based on information derived from a business’ or farm operations balance sheet. The term liquidity refers to the ability of a business or farm operation to meet their financial obligations of debt payments, taxes, and family living expenses. The Working Capital Ratio specifically measures how much capital is available within the business or farm operation within the short term (usually the annual financial year).
To determine the Working Capital ratio you subtract the Total Current Liabilities from the Total Current Assets.
Working Capital =
Total Current Assets -
Total Current Liabilities
If the number that is derived is a positive number then the business or farm operation should be able to cover its short-term liabilities. However, the closer to zero the number is the more susceptible the business is to unforeseen negative market changes.
Information for this article has been modified and gathered using material created by the University of Minnesota Center for Farm Financial Management (CFFM).
You can read the other articles in this series:
Part 1: The current ratio
Part 3: Working capital to gross revenues
Part 4: Debt-to-asset ratio
Part 5: Equity-to-asset ratio
Part 6: Debt-to-equity ratio
Part 7: Net farm income
Part 8: Rate of return on assets
Part 9: Rate of return
Part 10: Operating profit margin
Part 11: The EBITDA measurement of profitability
Part 12: Operating profit margin
Part 13: Capital debt repayment margin
Part 14: Replacement margin
Part 15: Term debt coverage
Part 16: Replacement margin coverage ratio
Part 17: Asset turnover rate
Part 18: Operating-expense ratio
Part 19: Depreciation-expense ratio
Part 20: Interest-expense ratio
Part 21: Net income ratio