Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Working Ratio

What it is:

A company's working ratio measures its ability to cover its annual expenses.

How it works (Example):

A company's working ratio indicates whether or not it is capable of at least breaking even by dividing its annual expenses by its annual revenues as shown:

Working Ratio = Yearly Expenses – (Debt + Depreciation) / Yearly Gross Revenue

A company with a ratio of 1 or less is capable of covering its expenses. A company with a ratio of 1 or greater is incapable of covering expenses.

To illustrate, suppose that in a given year company XYZ's yearly expenses (less debt and depreciation) amount to $2 million. In addition, company XYZ's total revenues for that year were $1 million. In calculating the ratio, we find the following:

Working Ratio = $2 million (yearly expenses less debt and depreciation) / $1 million (yearly gross revenue) 

Working Ratio = 2

With a working ratio of 2, company XYZ was unable to cover its expenses.

Why it Matters:

A company's ability to cover its own costs speaks to the financial health and viability of that company. The working ratio serves as a clear indicator of financial health because it not only reflects whether or not a company can clear expenses, but also the degree to which this is so.