Net Working Capital Ratio Homework Help, Tutoring
Net Working Capital Ratio Assignment Help, Net Working Capital Ratio Tutor Help:
Net Working Capital ratio:
Net Working capital is more a measure of cash flow than a ratio. It is an indication
of short term financial health of a business. It is computed as:
Current assets - Current liabilities
The result of this ratio or measure is either a positive or a negative number. A
positive number indicates that the company has enough liquid assets to pay off short
term obligations. Working capital ratio must be looked at over a period of time
(several years). A declining ratio over several years may indicate that the company’s
financial position is not sound. Banks generally look at net working capital over
a period of time to determine a company’s financial strength. The eligibility of
bank loans are also tied to minimum working capital requirements.
An Example
Compute net working capital ratio from the information given below:
| Current assets: | Current liabilities: | ||||
| Inventories | $20,000 | Accounts payable | $18,000 | ||
| Sundry debtors | 5,000 | Short-term loan | 15,000 | ||
| Cash on hand | 12,000 | Bank overdraft | 5,000 | ||
| Cash at bank | 8,000 | Outstanding expenses | 3,000 | ||
| Accounts receivables | 35,000 | Provision for taxation | 10,000 | ||
| Short-term investments | 15,000 | Proposed dividends | 12,000 | ||
| 95,000 | 63,000 | ||||
|
|
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| Net working capital ratio: | Current assets - Current liabilities | ||||
|
95,000 - 63,000
32,000 |
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