Final answer:
The working capital ratio measures a company's ability to cover its short-term liabilities with its short-term assets. A higher ratio is generally favorable, indicating good financial health.
Step-by-step explanation:
The working capital ratio is a financial ratio that measures a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing the current assets of a company by its current liabilities. A higher working capital ratio indicates that a company has more current assets to cover its current liabilities, which is generally considered favorable and indicates good financial health. On the other hand, a lower working capital ratio suggests that a company may have difficulty in meeting its short-term obligations.
However, it is important to note that a high working capital ratio does not necessarily mean that a company is performing well. It could indicate that the company is not effectively utilizing its assets or that it is carrying excessive inventory or cash reserves. A low working capital ratio may also have limitations, as it could mean that the company is relying too heavily on short-term financing.