Working Capital Ratio
Working capital ratio may have several meanings in practice:
(1) Working capital ratio = Working capital / Sales
(2) Working capital ratio = Current ratio = Current assets / Current liabilities
(3) Working capital ratio = Working capital
Every meaning of working capital ratio is completely different and it is important not to mix them in between when working capital ratio is compared to the same ratio of other companies calculated by other analysts. One should remember that calculation of working capital also might be different.
(1) This ratio version (Working capital / Sales) is used to compare whether the working capital is too high too low or normal for the company according to its scale. It is used for the same company and different periods, or for comparison of similar companies and the same period.
(2) This ratio (Current ratio) is used to determine if company has enough of current assets if there would be a need to cover current liabilities.
(3) Some (mostly amateurs) use this version of ratio to describe ‘working capital’.