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Working capital ratio
Also called current ratio, liquidity ratio.
Current assets divided by current liabilities, giving a single figure for whether a business can cover its next twelve months of obligations from short-term resources.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Above 1.0 means current assets exceed current liabilities. Below 1.0 means they do not. Lenders set covenant thresholds against it on term loans and lines, and breaching one is an event of default even when every payment has been made — which is the point of a covenant.
What counts as healthy is industry-dependent and the ratio is easy to misread in isolation. A restaurant with negligible receivables and fast inventory turnover operates safely at a level that would alarm a lender looking at a manufacturer. A high ratio can indicate strength or can indicate slow-moving inventory and uncollectable receivables sitting in the numerator.
The quick ratio strips inventory out and is the harsher test: cash plus receivables over current liabilities. Where inventory is specialised, perishable or ageing, the quick ratio is the one that reflects reality.
Where this one catches people
New financing is not neutral to the ratio and business owners routinely assume it is. Drawing on a line or taking an advance adds cash to current assets and adds the next twelve months of repayment obligation to current liabilities. Because short-term financing repays fast, the liability side often grows by more than the asset side survives — so borrowing to fix a covenant breach can deepen it. Run the ratio with the new facility included before signing, not after.
Worked through
Illustrative only. Current assets $400,000, current liabilities $320,000, ratio 1.25. Take a $100,000 advance repaying $130,000 within twelve months. Cash rises to $500,000; current liabilities rise by the $130,000 due within the year, to $450,000. New ratio: 1.11. If the loan covenant requires 1.20, the business breached it by borrowing.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
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Working capital ratio — common questions
What does working capital ratio mean?
Current assets divided by current liabilities, giving a single figure for whether a business can cover its next twelve months of obligations from short-term resources.
Where does working capital ratio catch people out?
New financing is not neutral to the ratio and business owners routinely assume it is. Drawing on a line or taking an advance adds cash to current assets and adds the next twelve months of repayment obligation to current liabilities. Because short-term financing repays fast, the liability side often grows by more than the asset side survives — so borrowing to fix a covenant breach can deepen it. Run the ratio with the new facility included before signing, not after.
Is working capital ratio the same as an interest rate?
Working capital ratio is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does working capital ratio apply to?
Term Loan, Business Line of Credit, SBA Loan, Asset-Based Lending.
Is there a worked example of working capital ratio?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside working capital ratio?
Cash flow, Covenant, Debt service coverage ratio, Underwriting, Working capital.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.