Working Capital to Debt Ratio in Excel Formula

The working capital to debt ratio is a measure of a company’s ability to pay off all its debts using only its working capital. Working capital is the difference between a company’s current assets and current liabilities. Current assets are the assets that can be easily converted into cash within a year, such as cash, accounts receivable, and inventory. Current liabilities are the obligations that are due within a year, such as accounts payable, accrued expenses, and short-term loans. The working capital to debt ratio reflects the liquidity and solvency of a company, as well as its financial risk. A higher ratio means that the company has more working capital than debt, which indicates that it can meet its short-term obligations and has lower financial leverage. A lower ratio means that the company has more debt than working capital, which implies that it may face liquidity problems and has higher financial leverage.

Formula

The formula for calculating the working capital to debt ratio is:

W or kin g C a p i t a l t o De b t R a t i o = W or kin g C a p i t a l / T o t a l De b t

Where:

Working Capital = Current Assets – Current Liabilities
Total Debt = Short-Term Debt + Long-Term Debt

The working capital to debt ratio can be expressed as a percentage or a decimal number. For example, a ratio of 0.5 means that the company has 50 cents of working capital for every dollar of debt.

Procedure

To calculate the working capital to debt ratio in excel, we need to follow these steps:

Enter the values of current assets, current liabilities, short-term debt, and long-term debt in separate cells. For example, we can enter them in cells A2, B2, C2, and D2, respectively.
Calculate the working capital by subtracting the current liabilities from the current assets. We can use the formula =A2-B2 in cell E2.
Calculate the total debt by adding the short-term debt and the long-term debt. We can use the formula =C2+D2 in cell F2.
Calculate the working capital to debt ratio by dividing the working capital by the total debt. We can use the formula =E2/F2 in cell G2.
Format the result as a percentage or a decimal number, depending on the preference. We can use the Format Cells option in the Home tab and select the Number or Percentage category.

Example

Let’s assume that we have the following data for a company:

Current Assets	Current Liabilities	Short-Term Debt	Long-Term Debt
$100,000	$60,000	$20,000	$80,000

Using the procedure above, we can calculate the working capital to debt ratio in excel as follows:

Current Assets	Current Liabilities	Short-Term Debt	Long-Term Debt	Working Capital	Total Debt	Working Capital to Debt Ratio
$100,000	$60,000	$20,000	$80,000	$40,000	$100,000	40%

The working capital to debt ratio for this company is 40%, which means that it has 40 cents of working capital for every dollar of debt. This indicates that the company has a moderate level of liquidity and solvency, but also a moderate level of financial risk.

Alternative Approaches

There are some alternative approaches to calculate the working capital to debt ratio in excel, such as:

Using the SUM function to calculate the working capital and the total debt. For example, we can use the formula =SUM(A2,-B2) in cell E2 and the formula =SUM(C2,D2) in cell F2.
Using the SUMPRODUCT function to calculate the working capital to debt ratio directly. For example, we can use the formula =SUMPRODUCT(A2:D2,{1,-1,1,1})/SUMPRODUCT(A2:D2,{0,0,1,1}) in cell G2. This formula multiplies the values in the range A2:D2 by the corresponding coefficients in the arrays {1,-1,1,1} and {0,0,1,1}, and then sums up the products. The first array represents the signs of the working capital components, and the second array represents the signs of the total debt components.
Using the RATIO function to calculate the working capital to debt ratio directly. For example, we can use the formula =RATIO(A2-B2,C2+D2) in cell G2. This function returns the ratio of two numbers as a decimal number.

Conclusion

The working capital to debt ratio is a useful metric to assess the liquidity and solvency of a company, as well as its financial risk. It shows how much working capital the company has relative to its total debt. A higher ratio means that the company has more working capital than debt, which implies that it can meet its short-term obligations and has lower financial leverage. A lower ratio means that the company has more debt than working capital, which suggests that it may face liquidity problems and has higher financial leverage. The working capital to debt ratio can be easily calculated in excel using the formula =Working Capital/Total Debt, where working capital is the difference between current assets and current liabilities, and total debt is the sum of short-term debt and long-term debt. There are also some alternative approaches to calculate the ratio in excel, such as using the SUM, SUMPRODUCT, or RATIO functions. The working capital to debt ratio can be expressed as a percentage or a decimal number, depending on the preference.