Working Capital to Total Assets

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Working Capital to Total Assets

Working Capital to Total Assets =

(Total Current Assets - Total Current Liabilities)

Total Assets

INTERPRETATION

The working capital to total asset ratio records net liquid assets relative to total assets. It’s one of the most valuable indicators of a company’s short-term solvency.

Business owners, managers, and other interested parties use it to measure a company’s ability to meet its payment obligations as they fall due.

Note: expanded calculation
Divide the current assets less the current liabilities by the business’s total assets.

EXAMPLE

M&M company reported

Current Asset $30,000

Current Liabilities $20,000

Total Assets $100,000

Working Capital to Total Assets = ($30,000 – $20,000) /$100,000 = 0.1 = 10%

M&M has a net working capital of 10% of its total assets. So the company has enough cash to use and does not need to sell any fixed assets to settle with liability.

BENCHMARK: HA, PG, EB, ROT

There is no “correct” value for the working capital to total asset ratio. Generally, a high percentage is indicative of liquidity and financial strength. An increasing ratio over time shows that the company’s liquidity is improving.

However, the level varies from industry to industry, and a high ratio as increasing current assets might indicate inefficiencies in inventory management, accounts receivable, or cash not being invested in the business operations.

A negative ratio signifies that the business is in financial distress and does not have the necessary liquid assets to pay its current liabilities as they fall due.

Working Capital to Total Assets:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.