Is It Fine for One Company to Have as Low Or High a WCR as Another?
When some use the terms WC or NWC in writings, they are referring to the working capital ratio (WCR), which is also known as the current ratio.
Ideally, a company’s current ratio has to be 2:1 for it to be considered financially stable in the short term. Generally, this is expressed as a ratio of 1. Anything higher or lower than that may not sound good to someone that’s considering lending.
This ratio is meaningful only in relation to another standard, like similar businesses in the same sector, or own previous results. The current ratios vary across companies and industries of different sizes. For instance, a retail outlet may have a higher ratio than 1 because it has to retain a particular number of things in stock. Conversely, an IT company may have an extremely low working capital ratio as it may have no inventory at all, in addition to having very little debt and minimal accounts receivables. To a certain extent, it is in some companies’ nature to have a high and very low WCR, and usually, there is nothing seriously wrong with that. An ‘X’ company may or may not have as bad a ratio as a ‘Y’ company, depending on its short-term financial situation.