• These ratios help assess liquidity, financial structure and profitability.

8.1 Working Capital

• Working capital = Current Assets − Current Liabilities.
• It represents liquid/easily convertible funds available after paying short-term liabilities.
• Example in the material: £230,000 current assets − £196,000 current liabilities = £34,000 working capital.

8.2 Current Ratio / Working Capital Ratio

• Formula: Current Assets ÷ Current Liabilities : 1.
• Example: £230,000 ÷ £196,000 = 1.17:1.
• It indicates how far current liabilities can be covered by current assets.
• The material states an ideal ratio of about 2:1.
• Below 1:1 may indicate difficulty meeting debts.
• Above 2:1 may indicate under-utilisation of available funds.

8.3 Acid Test / Quick Assets Ratio

• Formula: (Current Assets − Stock) ÷ Current Liabilities : 1.
• Stock is excluded because it may take time to convert into cash.
• Example: (£230,000 − £23,000) ÷ £196,000 = 1.06:1.
• The material states the ideal position is approximately 1:1.
• Liquidity must be monitored even where a business is profitable, because inability to pay debts can lead to court action and potentially liquidation.

8.4 Total Capital Employed

• Formula: Total Assets − Current Liabilities.
• Example: £1,311,000 fixed assets + £230,000 current assets = £1,541,000 total assets.
• £1,541,000 − £196,000 current liabilities = £1,345,000 capital employed.

8.5 Return on Capital Employed (ROCE)

• Basic profitability measure.
• Formula: Net Profit Before Tax ÷ Capital Employed × 100.
• Example: £205,000 ÷ £1,345,000 × 100 = 15.24%.