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Net working capital to current assets

Method of calculation

Formula for net working capital to current assets: net working capital / (inventory + short-term receivables) * 100%

where:

Formula for net working capital: net working capital = current assets - short-term liabilities

Ratio's description

The ratio complements the assessment of company's financial liquidity. It indicates the share of net working capital in financing the inventory and short-term receivables.

Ratio's interpretation

  • 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.

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