What Does a Company’s Current Ratio of over 1 Usually Mean?
An ideal working capital ratio (WCR) is 2:1, or simply 1. Now, what does this mean? Let us find out with an example.
Suppose that for the financial year, ‘X’ company had current assets which were valued at 36.54 billion. Current assets included cash and its equivalents, namely marketable securities, short-term investments, prepaid expenses, accounts receivable, inventories, and assets being held for sale.
Now suppose this same company’s current liabilities for that same year equaled $27.19 billion. These liabilities included accrued expenses, accounts payable, notes payable, accrued income taxes, liabilities being held for sale, etc.
As per the above-mentioned information, the company’s WCR is 1.34, which is what you get when you divide the current assets by the current liabilities. That gives you the working capital formula.
When you apply this working capital ratio formula in the above-mentioned example, you got a ratio of over one. Usually, it can be inferred from this that that company is in a healthy financial situation. However, this does not have to be the case always, because many things—including general economic conditions—can affect the sales and purchases of a company; hence the working capital ratio.