The solvency ratio measures a company’s ability to meet its debts.

It determines if a company has sufficient assets to pay all debts and payment obligations at a given time.

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The working capital is a part of a company’s current assets, financed with long-term debt.

The working capital is known by other names such as circulating capital, rotation fund or working capital.

How to calculate working capital

We can calculate working capital if we make the difference between current assets and current liabilities.

Working capital = Current assets - Current liabilities

This data will vary depending on the moment you calculate it, due to the company’s activity, so its control is very important to guarantee the company’s liquidity and solvency in the short term.

What result can working capital have?

• Positive: when current assets are greater than current liabilities. The company can meet its immediate payment commitments.

• Null: When current assets equal current liabilities. The company runs the risk of not being able to meet its short-term payments, in case some collection is delayed.

• Negative: When current assets are less than current liabilities. It is the worst situation for the company since it will not be able to pay its short-term debts.

The best situation for a company is to have positive working capital since it means that the company has money (current assets) to meet its payments even if its collections are delayed.

We hope this information is very useful to you ;)