Working Capital and Current Ratio Calculator
Working Capital and Current Ratio Calculator
Whether a business can pay the bills due within a year from the assets it will turn into cash in that time: working capital, the current ratio and the stricter quick ratio.
Current ratio
Cash $6,00,000, receivables $9,00,000, inventory $12,00,000, prepaid $1,00,000; current liabilities $16,00,000
Working capital, current ratio and quick ratio
- CA
- current assets: cash, receivables, inventory, prepaid expenses and other assets expected to turn into cash within a year
- CL
- current liabilities: obligations due within a year
- quick ratio
- leaves out inventory and prepaid expenses, which are slower or impossible to turn into cash
Worked example
Cash $6,00,000, receivables $9,00,000, inventory $12,00,000, prepaid $1,00,000; current liabilities $16,00,000
Current assets = 6,00,000 + 9,00,000 + 12,00,000 + 1,00,000 = $28,00,000
Working capital = 28,00,000 − 16,00,000 = $12,00,000
Current ratio = 28,00,000 ÷ 16,00,000 = 1.75
Quick ratio = (6,00,000 + 9,00,000) ÷ 16,00,000 = 0.94
Reading the current ratio — and why the rules of thumb vary
Working capital is what is left of current assets after paying current liabilities: the cushion a business has for the next twelve months. The current ratio expresses the same thing as a multiple. In the example, $28,00,000 of current assets against $16,00,000 of current liabilities gives 1.75 and working capital of $12,00,000.
The quick or acid-test ratio is stricter. It leaves out inventory, which has to be sold before it is cash, and prepaid expenses, which will never be cash at all. In the example it falls to 0.94: without selling stock, the most liquid assets would not quite cover the bills. For a business carrying a lot of stock, the gap between the two ratios is the question to ask about.
The bands on this page are textbook rules of thumb, not standards. OpenStax’s accounting text says many companies aim for a current ratio of 1.5 to 2, while utilities with steady cash flows might run at 1.25 to 1.5 and high-tech start-ups at 2.5 to 3. Its finance text notes that 2:1 is actually quite high for most industries, and that any ratio should be read against the industry and the trend rather than alone. A supermarket that is paid in cash by customers and pays suppliers later can run happily below 1; a builder with slow-paying clients needs much more. A high ratio is not automatically good either: cash sitting idle, debtors who pay late and stock that does not move all push it up.
Use figures from the same balance sheet date, and classify honestly: the part of a long-term loan due within a year is a current liability. For a household version of the same idea, the net worth calculator and the emergency fund calculator look at personal assets and cash buffers. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
How do you calculate working capital?
Current assets minus current liabilities. 28,00,000 − 16,00,000 = $12,00,000 in the example.
What is a good current ratio?
OpenStax’s accounting text says many companies aim for 1.5 to 2, but the right level depends on the industry: some run well at 1.25, others need 2.5 or more. It is a rule of thumb.
What is the difference between the current ratio and the quick ratio?
The quick (acid-test) ratio leaves out inventory and prepaid expenses and counts only cash, short-term investments and receivables.
What does a current ratio below 1 mean?
Current liabilities exceed current assets, so working capital is negative. The business may need to borrow or collect faster to pay its bills.
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References
- Franklin M, Graybeal P, Cooper D. Principles of Accounting, Volume 1: Financial Accounting. OpenStax, Rice University, 2019. Section 5.3: working capital = current assets − current liabilities; current ratio = current assets ÷ current liabilities; “many companies would like to maintain a 1.5–2 times” ratio, with utilities perhaps 1.25–1.5 and high-tech start-ups 2.5–3.
- Dahlquist J, Knight R. Principles of Finance. OpenStax, Rice University, 2022. Section 6.3, Liquidity Ratios: the quick (acid-test) ratio counts cash, short-term investments and accounts receivable, leaving out inventory and prepaid expenses; a 2:1 current ratio “is actually quite high for most companies and most industries”; ratios should be read against the industry and the trend.