The working capital ratio, also called the current ratio, is a liquidity ratio that measures a firm’s

ability to pay off its current liabilities with current assets. The working capital ratio is important to
creditors because it shows the liquidity of the company.

Current liabilities are best paid with current assets like cash, cash equivalents, and marketable
securities because these assets can be converted into cash much quicker than fixed assets. The
faster the assets can be converted into cash, the more likely the company will have the cash in time
to pay its debts.

The reason this ratio is called the working capital ratio comes from the working capital calculation.
When current assets exceed current liabilities, the firm has enough capital to run its day-to-day
operations. In other words, it has enough capital to work. The working capital ratio transforms the
working capital calculation into a comparison between current assets and current liabilities.