Calculate your working capital and current ratio, key measures of short-term financial health, from current assets and current liabilities.
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Working Capital = Current Assets − Current Liabilities. Current Ratio = Current Assets ÷ Current Liabilities. Both measure a company's ability to cover short-term obligations with short-term assets.
For example, 150,000 in current assets against 100,000 in current liabilities gives 50,000 in working capital and a current ratio of 1.5.
Positive working capital (and a current ratio above 1) generally means a business can cover its near-term obligations. Negative working capital can signal liquidity trouble, though some business models (like subscription businesses collecting cash upfront) operate normally with low or negative working capital.
Treating negative working capital as automatically alarming, some business models (subscriptions, grocery retailers collecting cash before paying suppliers) run normally on low or negative working capital.
Including illiquid or slow-moving inventory in current assets at full face value, overstating actual short-term liquidity.
Looking at working capital as a single snapshot rather than tracking the trend, a steadily shrinking figure is a more useful early warning sign than one low reading.
Current assets are those expected to convert to cash within a year (cash, receivables, inventory). Current liabilities are obligations due within a year (accounts payable, short-term debt, accrued expenses).
A current ratio between 1.5 and 3 is often considered healthy, though this varies by industry. A ratio below 1 can indicate difficulty covering short-term obligations, while a very high ratio may suggest assets aren't being used efficiently.
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