Net Working Capital
Working capital, sometimes called gross working capital, simply means current assets. The company's net working capital is calculated by subtracting total current liabilities from total current assets. The net working capital for Jimco in 1993 was as follows:
|Net Working Capital =||Current Assets - Current Liabilities|
|NWC||$24,000,000 - $10,100,000 = $14,000,000|
One of the most general and most frequently used of these ratios is the current ratio.
|Current ratio =||Current assets|
|$24,000,000||= 2.40 times|
industry average = 2.02 times
For 1993 Jimco's current assets were 2.40 larger than its current liabilities.
The higher the ratio, supposedly, the greater the ability of the firm to pay its bills. However, the ratio must be regarded as a crude measure of liquidity because it does not take into account the liquidity of the individual components of the current assets.