What formula is used to calculate the working capital ratio?

The working capital ratio is calculated using the formula that involves current assets and current liabilities. The correct approach is to subtract current liabilities from current assets. This gives a clear measure of a company's short-term financial health, showing the amount of liquid assets available to cover short-term obligations. If current assets exceed current liabilities, it indicates that the company is in a strong position to manage its immediate financial commitments.

The formula specifically highlights the concept of liquidity; a higher working capital indicates that a company has more cash available to meet its short-term needs. This is crucial for operational efficiency and can help in assessing the overall financial stability of a business.

Other formulas provided do not correctly represent the calculation of the working capital ratio for various reasons. For instance, adding current assets and current liabilities does not give insight into liquidity, and the definitions involving only current liabilities or rearranging them lack relevance to assessing working capital.