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Measures a company’s ability to reduce its debt.[sc:kit02 ]
Working Capital to Debt Formula
Explanation of Working Capital to Debt
The Working Capital to Debt ratio measures the ability of a company to eliminate its debt using its Working Capital (Total Current Assets – Total Current Liabilities). A company that has the ability to quickly pay off its debt if it needs to is looked favorably by creditors and is generally a sign of good financial health.
Importance of Working Capital to Debt
A high, or increasing Working Capital to Debt ratio is usually a positive sign, showing the company can liquidate its Working Capital to quickly pay off its debt, if it had to do so. An event like this would usually be rare; often an extreme downturn in the industry the company operates within, or drastically negative happenings within the company.
Nevertheless, monitoring this ratio is very important to make sure the company has the capability to satisfy its creditors. A ratio of 1.0 or higher is desirable, as this shows the company could pay down its debt with Working Capital.