Working Capital as a % of Revenue
How is it calculated?
Working Capital as % of Revenue = (Current Assets - Current Liabilities) / Revenue
Goal of the Ratio
The goal of the Working Capital as a % of Revenue is to determine the overall liquidity position of the business in relationship to the size of the businesses revenue. The true liquidity value of a company’s working capital can only be gauged when viewed relative to the size of the overall business. Higher %s indicate more liquidity and ability to meet short term payment obligations, and Lower %s indicate a lesser ability to do the same. This ratio can be either positive or negative.
When is it used?
This ratio can be used in all situations to gauge overall liquidity.
Rules of Thumb
Higher is better - From a bankers perspective because it shows the borrower is better positioned to make payments if a short term cash flow interruption were to occur and the borrower would be in a better position to act on opportunities that may present themselves.
Please note all ratios should be viewed in relation to industry norms to determine overall adequacy.
What changes in the ratio could mean:
Some example reasons why Working Capital as a % of Revenue can change:
- (+/-) Net Income
- Ownership Contributions
- Ownership Distributions
- Sale of Fixed Assets
- Purchase of Fixed Assets
- Additional Principal Reduction on LT Debt
- WC Injection through new borrowings
Other Relevant Terms
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