What Is a Good Working Capital Ratio?

This post was originally published on On Deck

In business finance, the working capital ratio indicates a company’s short-term financial health and efficiency. Maintaining a good working capital ratio is essential for measuring liquidity, managing debts and fostering growth for your small businesses.

Let’s break down what a good working capital ratio looks like, how to calculate it and why it matters for your small business.

What Is a Good Working Capital Ratio?

Think of the working capital ratio, sometimes called the current ratio, as a snapshot of your business’s financial health. It compares your company’s current assets (like cash on hand, accounts receivable and inventory) to your short-term liabilities (like loans and accounts payable).

A ratio between 1.5 and 2 is generally seen as just right — it means you’ve got a healthy balance. You’re able to pay off debts while still having enough to grow. A high working capital ratio can be a mixed bag, suggesting you might be sitting on too much inventory or not investing enough in growth.

How Do You Calculate Your Working Capital Ratio?

To calculate your working capital ratio, divide your current assets by your current liabilities. Both of these figures are found on your balance sheet. This calculation tells you

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