The working capital ratio, also known as the current ratio, is a financial metric that measures a company’s ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A ratio greater than 1 indicates that a company has more assets than liabilities, signaling good liquidity and financial health.
What is a good working capital ratio for startups?
A working capital ratio between 1.2 and 2.0 is generally considered healthy. A ratio below 1 may indicate liquidity issues and difficulty meeting short-term obligations, while a ratio significantly above 2 could suggest inefficient use of assets or excess liquidity that might be better invested in growth opportunities.
Why is the working capital ratio important for startups?
The working capital ratio provides insights into a startup’s short-term financial health and operational efficiency. It helps startups ensure they have enough liquidity to cover day-to-day expenses while highlighting potential issues like over-reliance on credit or underutilized assets. Investors and lenders often use this ratio to assess a startup’s financial stability.
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