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Posted by: Sandy on 2009-07-09, 20:26:47
Yes and no. It depends on what makes up the current assets. The working capital ratio attempts to show the amount of liquid resources that can be made available to cover short term liabilities, i.e. to pay the company's short-term debts as they fall due. If the company is not a merchandising company and has no inventory, then a high working capital ratio would probably mean that it's able to pay its debts. However if the current assets include a high level of inventory, then in an emergency situation when all or some of its creditors demand payment on an immediate basis, it might not have the liquid funds to pay off these debts. That is why some prefer to use the acid-test ratio (aka the quick ratio) as a better indication of liquidity as it removes inventory from the numerator. |
