cash to working capital ratio

Cash to working capital ratio

Cash to WC ratio is a liquidity ratio through which we determine how much percent of the working capital ratio will be covered by the cash & cash equivalents present in the company.

When you analyze what percentage of a firm’s working capital (WC) derives from its cash and cash equivalents, you get a more sophisticated picture of how much liquidity the company actually has.

Formula-

Cash to WC ratio ratio is the ratio of cash & cash equivalents and working capital

cash to working capital ratio

Cash to Working Capital ratio = Cash & cash equivalents / working capital

Working capital = Current assets – Current liabilities

Cash to WC ratio = Cash & cash equivalents / (Current assets – Current liabilities)

If you do not know about Current Assets, Current Liabilities, and Cash & Cash Equivalents, then you must read the first post on liquidity ratio to make it easier to understand cash to working capital ratio. Read now

You can find the data of current assets and current liabilities, cash & cash equivalents on the balance sheet of any Indian company on the website https://www.moneycontrol.com/.

Example-

1-If you are considering Company BHEL as a potential investment, one of the many pieces of information you examine is the liquidity position of the company. Whose is checked by cash to working capital ratio.

To get the data of current assets and current liabilities first of all you have to visit the website of https://www.moneycontrol.com/ after that you will have to search by entering the name of the company and you will have to click on the option of financial data upwards. you will get an option of a balance sheet as soon as you click. On which you can find current assets, Cash & cash equivalents, and current liability by clicking.

Current assetsCurrent liabilities
Current investment – 0.00 cr.22,647.41
Inventories – 8,905.46 cr.
Trade receivable – 7,107.62 cr.
Cash & cash equivalents – 6,418.56 cr.
Short-term loan and advances – 134.99 cr.
Other current assets – 10,136.90 cr.
Total current assets – 32,703.53Total current liabilities – 22,647.41
  • Cash & cash equivalents = 0.00 + 6,418.56 = 6418.56 cr.
  • Working capital = 32703.53 – 22647.41 = 10,056.12 cr.

When we plug the relevant data into the above formula, we get the working capital ratio of the BHEL company.

Cash to working capital ratio = 6418.56 / 10,056.12 = 0.638 = 63%

2. We take another example of PC jewellers

  • Current assets = 7,380.99 cr.
  • Current liabilities = 3,733.01 cr.
  • Cash & cash equivalents = 226.91 cr.
  • Current investment = 7.53 cr.

The amount that will be immediately converted into cash = Cash & cash equivalents 226.91 cr + 7.53 cr. = 234.44

Working capital = 7380.99 – 3733.01 = 3647.98 cr.

Cash to working capital ratio = 234.44 / 3647.98 = 0.064 = 6.4%

Analysis

The higher the cash to working capital ratio of a company, the more the working capital of the company is available in the form of cash and the more liquidity the company has.

If the cash-to-working capital ratio is low, it could mean that the company will have trouble supporting its short-term debt due to a lack of cash.

  • If the working capital ratio of a company is less than 50%, then it means that the company does not have enough cash to meet its short term liabilities. And should stay away from investing in such companies
  • If the cash to net-working capital ratio of a company is more than 50%, then it means that most of the working capital of the company is present in the form of cash and it will meet its short term liabilities comfortably. We must think to invest in such companies.

implementation

In the above example, we calculated the net working capital of BHEL and PC Jewellers Company. Now we will try to know which company is worth investing in.

  • In the above example No.1, BHEL’s cash to work capital ratio is 63%. This means that most of the working capital of the company is available in the form of cash so that the company can meet its short term liabilities. We must think to invest in such companies
  • PC Jewellers has the cash to working capital ratio is 6.4%, which means that the company has so little cash that it cannot meet its short-term liabilities. We should stay away from investing in such companies

In the next post, we will learn about cash to working capital ratio.

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