Inventory to Working Capital Definition and Explanation

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Quick Definition

Measures the affect of a company’s inventory level on its ability to operate profitably.

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Inventory to Working Capital Formula

Explanation of Inventory to Working Capital

The Inventory to Working Capital ratio measures how well a company is able to generate cash using Working Capital at its current inventory level.

Importance of Inventory to Working Capital

An increasing Inventory to Working Capital ratio is generally a negative sign, showing the company may be having operational problems. If a company has too much Working Capital invested in Inventories, they may have difficulty having enough Working Capital to make payments on Short-Term Liabilities and Accounts Payable. This is a great ratio to be used with several others to thoroughly investigate the inner workings of a company.