Working Capital Ratio

Current assets divided by current liabilities, measuring a business's ability to meet its short-term obligations. A ratio above 1 indicates the business can cover its near-term debts.

A healthy working capital ratio signals financial stability to banks and investors. A ratio below 1 means current liabilities exceed current assets, a warning sign of potential insolvency if cash is not managed carefully.

A founder's business has £30,000 in current assets (cash, receivables, stock) and £15,000 in current liabilities (invoices due, VAT, short-term loan repayments). Her working capital ratio is 2.0, indicating a comfortable buffer to meet near-term obligations.