Working capital, current ratio and quick ratio: a worked example
Calculate net working capital, the current ratio and the quick ratio from balance-sheet inputs, with a worked three-quarter example and its limits.
Net working capital is current assets less current liabilities. The current ratio divides the same two numbers, and the quick ratio removes inventory from the numerator. All three come from one balance-sheet date, so enter every figure on the same date and in the same currency.
How do you calculate net working capital?
Take a fictional operating unit at the end of its first quarter: cash $50,000, receivables $70,000, inventory $60,000 and current liabilities $100,000.
| Item | Formula | Result |
|---|---|---|
| Current assets | =SUM(B11:D11) |
$180,000 |
| Net working capital | =F11-E11 |
$80,000 |
| Current ratio | =IF(E11<=0,"",F11/E11) |
1.80 |
| Quick ratio | =IF(E11<=0,"",(B11+C11)/E11) |
1.20 |
The IF guard matters. A period with no current liabilities would otherwise return a divide-by-zero error, and a blank is more honest than an invented ratio.
What does the quick ratio leave out?
The quick ratio counts cash and receivables only. Inventory has to be sold before it becomes cash, so excluding it shows how well the unit could meet its obligations without relying on sales. Here the quick ratio of 1.20 means $1.20 of cash and receivables for every $1.00 owed.
Prepaid expenses and short-term securities are the usual gray area. Pick a treatment, apply it to every period, and note it next to the table.
How do you compare several periods?
Put one period per row, as the working capital calculator does. A second quarter with cash $65,000, receivables $75,000, inventory $55,000 and liabilities $95,000 gives current assets of $195,000, working capital of $100,000, a current ratio of about 2.05 and a quick ratio of about 1.47.
Reading across rows shows direction. A rising current ratio caused only by growing inventory is weaker news than one caused by cash, which the quick ratio reveals.
Which limits apply to these ratios?
- A single date can hide seasonality; compare the same quarter across years.
- Industry norms differ, so no one ratio value is good in itself.
- Ratios do not show when payments fall due. Use a 13-week cash flow forecast for timing.
For a wider set of measures, the financial ratio analysis guide covers twenty ratios across three years.