What is a good working capital ratio?

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Page written by Ashlyn Brooks. Last reviewed on February 5, 2025. Next review due October 1, 2026.

Calculating your business’s working capital ratio is one of the simplest and most effective tools to get an idea of your financial standing. It provides a snapshot of whether your company has enough current assets to cover its short-term liabilities. But what makes a working capital ratio “good”? And what does it reveal about your liquidity? Let’s break it down.

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What is a working capital ratio?

The working capital ratio, also known as the current ratio, measures the relationship between your current assets and current liabilities. It’s calculated using the formula:

Working Capital Ratio = current assets / current liabilities

Suppose you run this calculation and get a positive number. In that case, it means your business has enough current assets to cover its short-term obligations— a good sign of financial stability.

However, if the result is negative, it’s a warning sign that your liabilities outweigh your assets. This could mean you might struggle to pay debts or meet operational expenses in the short term.

This ratio helps you quickly understand if your business can meet its short-term obligations with the assets it has readily available, like cash, receivables, and inventory.

Key points about the working capital ratio

There are a few key factors in the working capital ratio that contribute to the results and how you interpret the outcome. These sum up to an outcome above one, under one, or equal to one.

Above 1: Indicates your current assets exceed your current liabilities, which is a positive sign.
Below 1: Suggests potential liquidity issues, as you may not have enough assets to cover immediate debts.
Equal to 1: Means assets and liabilities are balanced, but there’s little room for error.

What can be considered a ‘good’ working capital ratio?

Typically a good working capital ratio (WCR) is between 1.5 and 2, here’s why. If you have a 1.5 WCR that is essentially saying you have enough liquidity to cover your expenses 1.5 times. So in essence you could afford to pay for every expense and still have a healthy amount left over.

An example of this would be saying you have expenses of $1 and your WCR is $1.50 so you could cover the $1 of expenses and still have $0.50 left over to provide a cushion for unexpected expenses, growth, or savings.

However, what’s considered a good ratio can vary depending on your industry and business model:

Retail businesses: They may operate efficiently with lower ratios due to fast inventory turnover and steady cash flow.
Manufacturing: Often requires higher ratios to account for longer production cycles and higher inventory levels.
Seasonal businesses: These may experience fluctuations in their ratio based on peak and off-peak periods.

When is the working capital ratio too high?

If you’re trending over a ‘2’ for your working capital ratio then it’s very possible you’re not employing your resources in a efficient way. Look at it this way, if you have a WCR of 2.5 and your expenses only require a ratio of 1.5 to cover them, it means you have excess assets sitting idle. This could be cash that’s not being reinvested, inventory that’s not moving, or receivables that are overdue. In other words, your business might be missing opportunities to use those resources for growth, like expanding operations, launching new products, or improving efficiency.

While a high WCR does show strong liquidity, it’s important to analyze why your ratio is so high and determine whether your assets could be better used to drive the business forward. It’s all about striking the right balance.

What does the ratio show about the liquidity of your business?

It’s by far one of the simplest ways to assess the liquidity of your business. Where metrics like the quick ratio or cash flow forecast can show you more detailed insights into specific aspects of financial health, the WCR provides a straightforward view of whether your business can cover its short-term liabilities with its current assets.

The WCR holds only the essentials: your ability to meet immediate financial obligations. This is what makes it the ‘go-to’ in terms of a quick and reliable metric for evaluating liquidity at a glance.

3 factors that the working capital ratio shows

Recapping this article into three takeaways for working capital ratio, here’s what you should know at this point:

A ratio in the “good” range (1.5–2.0) shows that your business is financially stable, with enough resources to handle daily operations and unexpected costs.
A ratio below 1 indicates that liabilities exceed assets, which could lead to cash flow issues or difficulty meeting short-term obligations.
A very high ratio may signal that your business isn’t using its resources effectively, potentially missing out on growth opportunities.

How Swoop can help

Looking to add some cash flow to increase your working capital ratio? Whether you need to improve your liquidity or free up cash for expansion, our platform offers tailored solutions to meet your needs.

Take control of your financial health today. Check available business loans with Swoop and discover smarter ways to manage your working capital.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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