Net working capital to current assets
Method of calculation
- The reference value is said to be equal 50%; it means that in properly operating company, the net working capital should cover 50% of the total value of inventory and short-term receivables.
- values below 50% may indicate that the level of net working capital is too low, which may lead to problems with maintaining the financial liquidity.
- values much greater than 50% may indicate that the level of net working capital is too high, which may in turn lead to lowered operating effectiveness resulting from excess liquidity.
- When assessing the changes in ratio's value over time (over few periods):
- maintaining the ratio's value at the level of 50%, or changes leading to this value, are assesed positively, indicating proper level of financial liquidity,
- the increase of ratio's value much above 50% is assessed negatively due to the risk of excess liquidity,
- the decrease of ratio's value much below 50% is assessed negatively due to the risk of loss of financial liquidity.
WARNING! If the net working capital is negative the ratio cannot be reliably interpreted.