Which component is considered when calculating working capital ratio?

The working capital ratio, also referred to as the current ratio, is a key measure used to assess a company’s short-term financial health and liquidity. It is calculated by dividing current assets by current liabilities. Current assets encompass assets that are expected to be converted into cash within one year, such as cash, accounts receivable, and inventory. The inclusion of current assets in the calculation is critical, as it provides insight into a company's ability to cover its short-term obligations with assets that are readily available. By focusing on current assets, stakeholders can evaluate whether the company is in a position to manage its day-to-day operational needs effectively and whether it can meet its short-term debts without additional financing.