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The working capital ratio indicates whether the business has enough short term assets to cover its short term obligations.It is a pointer towards the business's operational efficiency. If a business does not have current assets to cover its current liabilities, then it might cause difficulties in paying back creditors on time. A declining trend in working capital ratio over a period of time calls for further analysis of the financial situation of the business. The reasons can be one or many. Often, it could be due to decrease in sales volumes and as a result of which its accounts receivables are decreasing. A ratio below1 indicates negative working capital and a ratio over2 means that the business is not investing its excess current assets effectively. A ratio between1.2 and2.0 is regarded as optimum. Certain sectors, having seasonal business may call for a higher working capital.
if u need keep the ratio1 :2 , that's mean the current assets duble of current liabilities, it's reduce the risk of liquidate of long term assets , but at the same time the opportunity cost will be high , so the normal ratio is1 :1 , not1 :2 , but in last this is depend on the industry and the management strategy .
