Working capital ratio: what is it and how to calculate

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

The working capital ratio reveals whether the enterprise has enough of its own funds, which are necessary for its financial stability. The presence of a business entity's capital is one of the most important conditions for the effective operation of an enterprise. It belongs to the group of coefficients that determine the financial stability of the organization.

Equity funds show the level of liquidity and solvency, as well as how the company is able to close its obligations at the moment, realizing current assets. The security of own working capital is extremely important for the positive functioning of the enterprise.

In the absence of such, we can say that all working capital is formed from borrowed capital. This happens when there is a lack of one's ownsources.

The working capital ratio is supposed to be more than one tenth. With a smaller value, we can say that the business entity does not have enough own money to finance current activities. It should be noted that the value of this indicator is very strict, it is very difficult for Russian enterprises to achieve it.

The working capital ratio is calculated in the following ways:

Kosos=SobObSr / OA;

or Kosos=(SobKap - VneobA) / BothA;

or Kosos=(KR + DBP + RPR - VNA) / BothA, where:

- CobObSr is own funds;

- SobCap - equity;

- VneobA - non-current assets;

- KR - the result of the section on capital and reserves;

- DBP - income in future periods;

- RPR - reserves for future expenses;

- Both are current assets.

The meaning of the second formula is as follows: the difference in the numerator is the financing of the most low-liquid (non-current) assets, using the most stable sources - our own. In addition, part of the working capital should remain in order to ensure the financial activities of the company.

The ratio of current assets with own funds can also be determined using the balance:

Kosos=(490 -190)/290 (in lines).

This ratio does not apply in Western countries. It was introduced into Russian practice to determine the bankruptcy (or insolvency) of an economic entity.

The factors that determine how much an economic entity is provided with its own funds are revealed as a result of correlation and regression analyses. As a result, the most interconnected with the coefficient under consideration are the following:

- current liquidity;

- profitability of sales;

- inventory turnover;

- labor productivity.

The working capital ratio, along with these indicators, helps to compile the overall financial picture of the organization. And this is the most important characteristic of the enterprise. Thus, the competitiveness of an economic entity, its potential opportunities are determined, and the degree of guarantee of the economic interests of the company itself and its partners is also assessed. If an enterprise is financially stable, then among organizations of the same profile it is able to attract more investments, receive loans, choose suppliers and select qualified specialists.