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Net Working Capital Ratio Formula:
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The Net Working Capital Ratio (NWCR) is a financial metric that measures a company's ability to pay off its current liabilities with its current assets. It indicates the short-term financial health and liquidity position of a business.
The calculator uses the Net Working Capital Ratio formula:
Where:
Explanation: The ratio shows how many times current assets cover current liabilities. A higher ratio indicates better short-term financial health.
Details: The NWCR is crucial for assessing a company's liquidity, operational efficiency, and short-term financial stability. It helps creditors and investors evaluate the risk of insolvency.
Tips: Enter current assets and current liabilities in the same currency units. Both values must be positive numbers greater than zero for accurate calculation.
Q1: What is a good Net Working Capital Ratio?
A: Generally, a ratio between 1.2 and 2.0 is considered healthy. Below 1.0 may indicate liquidity problems, while above 2.0 may suggest inefficient use of assets.
Q2: How does NWCR differ from working capital?
A: Working capital is the absolute difference (Current Assets - Current Liabilities), while NWCR is the relative ratio (Current Assets / Current Liabilities).
Q3: What are typical current assets included?
A: Cash, accounts receivable, inventory, marketable securities, and other assets convertible to cash within one year.
Q4: What are typical current liabilities included?
A: Accounts payable, short-term debt, accrued expenses, and other obligations due within one year.
Q5: Can NWCR be too high?
A: Yes, an excessively high ratio may indicate that the company is not using its current assets efficiently to generate revenue and growth.