Q26. Working capital ratio
How is the working capital ratio calculated?
A26.
Working capital
= Current assets – Current liabilities
Working capital ratio
= Working capital / Total assets
= (Current assets – Current liabilities) / Total assets
[Entity 26-a]
Current assets = $360,000
Current liabilities = $150,000
Total assets = $600,000
Working capital
= $360,000 – $150,000 = $210,000
Working capital ratio
= $210,000 / $600,000 = 0.35
[Entity 26-b]
Current assets = $340,000
Current liabilities = $120,000
Total assets = $550,000
Working capital
= $340,000 – $120,000 = $220,000
Working capital ratio
= $220,000 / $550,000 = 0.40
[Note]
Entity 26-b has higher capacity in working capital than Entity 26-a.
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