This
KPI informs you whether the value of your Working Capital is enough to
service your business. It's rather like the company's blood pressure
test.
The
calculation for Working Capital Ratio is conducted from the Balance Sheet and
is simply Current Assets divided by Current Liabilities.
This
example below is showing a Working Capital Ratio of 1.3:1, which means that for
every R1 of Current Liability you have R1.30 in Current Assets.
We
need this amount of cover because the nature of our business dictates
that our stocks are always suffering the effects of depreciation and as
an industry, we have the tendency to pay out money at a faster rate
than we receive it.
Example:
A) Current Assets = R850,527 B) Current Liabilities = R654,251 C) Working Capital Ratio = 1.3:1 (A ÷ B)
Discussion:
This
KPI is also known as the Current Ratio and is one of the most
important ratios to monitor to ensure that you have enough cash
available on a day-to-day basis to enable your business to function
properly.