Working capital and current ratio in a company credit review

Start with comparable balance-sheet figures

Working capital is current assets minus current liabilities. The current ratio is current assets divided by current liabilities. Both calculations need figures for the same entity, balance-sheet date, currency, and units. Do not combine group assets with subsidiary liabilities or numbers from different reporting periods.

Read the labels and notes in the source accounts before calculating. If the report does not distinguish current from non-current items, do not invent that breakdown. A calculated ratio can look precise while its inputs are unsuitable for the question you are trying to answer.

The SEC’s balance-sheet explainer describes assets, liabilities, equity, and the distinction between current and longer-term items. It is a useful introduction to the source figures. SEC: What is a balance sheet?.

Worked example: the calculation and the missing context

The figures below are hypothetical and use USD thousands throughout. Current assets of 240 less current liabilities of 160 produce working capital of 80, or USD 80,000. Dividing 240 by 160 gives a current ratio of 1.5. These calculations describe the supplied balance sheet; they are not an approval threshold.

Examine what makes up the current assets

In the example, half the current assets are inventory. Ask whether the available notes explain its nature and whether the stock is relevant to the company’s ongoing trade. Receivables also need context: an amount owed to the company is not the same thing as cash already collected.

Compare the composition across periods when comparable figures exist. A rise in current assets driven by slow collections raises different questions from a rise driven by cash receipts. The ratio alone cannot tell you the age of receivables, inventory saleability, payment timing, or access to funding.

Use the calculation as a question generator

There is no single current ratio that approves every supplier, customer, industry, or transaction. Consider the business model, seasonality, accounting date, and proposed exposure alongside the available evidence. If current liabilities are zero, the division is undefined; do not display an infinite score as proof of exceptional strength.

Save the source values, units, calculation, and questions in the review file. If key inputs are missing, record that the ratio could not be calculated. Before ordering additional information, specify the entity and period needed and ask what can actually be obtained.