Working Capital Ratio

Working capital ratio (also called the current ratio) is a fundamental liquidity metric that tells you whether a company has enough short-term assets to cover its short-term debts. Current assets include cash, accounts receivable, inventory, and prepaid expenses. Current liabilities include accounts payable, accrued expenses, short-term debt, and the current portion of long-term debt.

A ratio of 1.0 means the company has exactly enough current assets to cover current liabilities, with zero margin for error. Most lenders and investors consider 1.2–2.0 healthy for operating businesses. Above 2.0 may indicate the company is not efficiently deploying its assets, excess cash sitting idle could be invested in growth. Below 1.0 is a warning sign that the company may struggle to meet near-term obligations.

For startups, the working capital ratio can be misleading if the majority of current assets are in accounts receivable that may not collect quickly. This is why it is often paired with the quick ratio (which excludes inventory) and cash ratio (which considers only cash and equivalents). SaaS companies with annual prepaid contracts often have favorable working capital ratios because deferred revenue appears as a liability but represents already-collected cash.