What does the Working Capital Ratio measure in a business?

The Working Capital Ratio is a financial metric that measures a company's short-term liquidity, specifically its ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A ratio greater than one indicates that the company has more current assets than current liabilities, suggesting a healthy liquidity position, while a ratio less than one may indicate potential difficulties in meeting short-term obligations.

This measure is essential for assessing a business's operational efficiency and financial stability, particularly in the short term. Investors, creditors, and management often rely on the Working Capital Ratio to understand whether the company can easily pay off its debts as they come due, thereby evaluating the firm's overall financial health and risk.

Other options do not reflect what the Working Capital Ratio specifically assesses. Profitability is measured using metrics like net profit margin or return on equity. Market share refers to a company's portion of sales in a specific market relative to its competitors and is not related to liquidity. Sales growth indicates changes in revenue over time and also does not pertain to the company's ability to cover short-term debts.