Calculate net working capital and liquidity ratios — current, quick and cash — from your balance sheet figures.
Working capital is the difference between current assets and current liabilities — it measures how much short-term financial cushion a company has. Positive working capital means the company can pay its bills for the next twelve months from what it already owns; negative working capital means it cannot, at least on paper. The figure matters because a profitable company can still run out of cash if its receivables come in slower than its payables go out.
Three ratios refine the picture. The current ratio (current assets ÷ current liabilities) is the broadest measure — above 1.0 is generally healthy, below 1.0 is a warning. The quick ratio, also called the acid test, subtracts inventory from current assets before dividing, because inventory is the hardest current asset to turn into cash quickly — a ratio above 1.0 means the company can pay its short-term debts without selling inventory. The cash ratio uses only cash and equivalents, the most conservative measure.
None of these ratios tell the whole story alone. A supermarket chain routinely runs on negative working capital because it sells goods before paying suppliers — that is a business model, not a crisis. A construction company with a current ratio of 3.0 may still be illiquid if most of its current assets are receivables that will not arrive for months. Use the ratios as a starting point, not a verdict, and compare them with industry benchmarks rather than with a universal rule.
Net working capital = current assets − current liabilities. Current ratio = CA / CL. Quick ratio = (CA − inventory) / CL. Cash ratio = cash / CL.
Generally above 1.0, and in many industries between 1.5 and 2.0. But it depends on the business — retailers often operate below 1.0 because they collect before they pay.
Current assets minus inventory, divided by current liabilities. It excludes inventory because it may take time to sell — the ratio shows whether the company can pay its debts from assets that are already or nearly liquid.
Yes. Some business models run on negative working capital by design — for example, supermarkets receive cash from customers before paying suppliers. For most businesses, sustained negative working capital is a risk.
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It is a starting point. A full analysis considers cash flow statements, debt maturity schedules, seasonality and industry benchmarks — none of which a single ratio captures.
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