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Net Working Capital Ratio

Net Working Capital Ratio Assignment / Homework Help
Net Working capital is more a measure of cash flow than a ratio. It is an indication of short term financial health of a business. It is computed as:

Current assets - Current liabilities

The result of this ratio or measure is either a positive or a negative number. A positive number indicates that the company has enough liquid assets to pay off short term obligations. Working capital ratio must be looked at over a period of time (several years). A declining ratio over several years may indicate that the company’s financial position is not sound. Banks generally look at net working capital over a period of time to determine a company’s financial strength. The eligibility of bank loans are also tied to minimum working capital requirements.

An Example

Compute net working capital ratio from the information given below:

Current assets: Current liabilities:
Inventories $20,000 Accounts payable $18,000
Sundry debtors 5,000 Short-term loan 15,000
Cash on hand 12,000 Bank overdraft 5,000
Cash at bank 8,000 Outstanding expenses 3,000
Accounts receivables 35,000 Provision for taxation 10,000
Short-term investments 15,000 Proposed dividends 12,000
95,000 63,000

Net working capital ratio: Current assets - Current liabilities
95,000 - 63,000
32,000


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