Cash To Working Capital Ratiois useful for determining the proportion of working capital that is made up of cash or investments that can be readily converted into cash. If the ratio is low, it may be an indication that a company will have trouble meeting its short-term commitments because of a lack of cash. If this were the case, the next formula to calculate would be the number of expense coverage days to determine exactly how many days of operations can be covered by existing cash levels.



Cash To Working Capital ratio Formula

Add together the current cash balance as well as any marketable securities that can be liquidated in the short term, and divide the total by current assets less current liabilities. The key issue is which investments to include in the measurement: since this is intended to be a measure of short-term cash availability, any investments that cannot be liquidated in one month or less should be excluded from the calculation.

The formula is:

Cash To Working Capital Ratio Formula 


Case Example Of Cash To Working Capital Ratio

The Lie Dharma Farming Company has a large inventory of potted orchids and roses on hand, which comprises a large proportion of its inventory and is recorded as part of current assets. However, the inventory turns over only three times per year, which does not make it very liquid for the purposes of generating short-term cash. The company’s financial analyst wants to know what proportion of the current ratio is really composed of cash or cash equivalents, since it appears that a large part of working capital is skewed in the direction of this slow-moving inventory. The relevant information is shown in table below:

Cash To Working Capital Ratio Case Example 

Based on this information, the financial analyst calculates the cash to working capital ratio as:

Cash To Working Capital Ratio Calculation


The financial analyst did not include the note receivable from the company officer, since it would be available for 90 days. This nearly halved the amount of the ratio to 18%, which reveals that the company should be extremely careful in its use of cash until more of the accounts receivable or inventory balances can be liquidated.

Cautions: This measurement can be considerably skewed by the timing of the measurement within the reporting period. For example: if a company has one large accounts payable check run scheduled each month, then its cash reserves will look large just prior to the check run and much lower afterward; the same situation will apply to payroll. In these situations, the measurement will drop precipitously right after the payment event, making the company cash situation look much worse than it really is.