Cash to Working Capital Definition and Explanation

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Quick Definition

Calculates a company’s ability to pay its short term debt using its most liquid assets, such as cash and securities.

Explanation of Cash to Working Capital

The Cash to Working Capital ratio measures how well a company can meet its short-term liabilities using its liquid assets such as Cash and Cash Equivalents and Marketable Securities. This ratio will also help uncover situations where the company may be too heavily spending its cash on inventory that is not being turned into sales as rapidly as it should be.

Importance of Cash to Working Capital

A decreasing Cash to Working Capital ratio can indicate the company may be suffering from low cash reserves, and may not be able to meet its financial obligations. A decreasing ratio may also mean it has acquired more assets. With more assets, one would hope that it could be using these additional assets to generate even more cash.