Working capital is a financial measure of a company’s operating health. It is calculated by taking current assets and subtracting current liabilities. For example, if a company has $1 million in current assets and $400,000 in current liabilities, the working capital is $600,000.
The working capital ratio shows whether a company has enough short-term assets to cover its short-term liabilities. It is calculated as the current assets divided by the current liabilities. In the above example, the ratio is:
$1 million / $400,000 = 2.5
A ratio below 1 indicates problems for the company, while a ratio higher than 2 means the company is probably not investing enough of its assets.