Net Working Capital Ratio

Net working capital (also called working capital) is current assets minus current liabilities. The net working capital ratio compares net liquid assets (net working capital) to total capitalization (total assets). The net working capital ratio measures the firm’s ability to meet its obligations and expand by maintaining sufficient working capital.

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The net working capital ratio is particularly meaningful when compared with the same ratio in previous years, especially if it is decreasing. Consistent operating losses will cause net working capital to shrink relative to total assets. Net liquid assets shrinking over time relative to total assets indicates possible future business failure.

If working capital is negative (current liabilities are greater than current assets), the net working capital ratio will also be negative. Negative working capital and a negative net working capital ratio are indicators of very serious problems.