What is considered an acceptable working capital ratio?

The correct answer identifies a working capital ratio that is generally considered to be healthy for a business's financial management. The working capital ratio, calculated as current assets divided by current liabilities, provides insight into a company's ability to cover its short-term obligations. A ratio between 1 and 2 indicates that the company has a sufficient cushion of current assets to meet its current liabilities, signifying a balanced approach to liquidity management.

A ratio of 1 suggests a company can cover its current liabilities exactly with its current assets, which is just adequate but does not provide much of a safety net for unforeseen expenses. A ratio above 2 could indicate an excessively conservative liquidity position, where too many assets are tied up in current forms (like cash or receivables) rather than being utilized for growth or investment opportunities. Therefore, the range between 1 and 2 is optimal, reflecting a good balance of liquidity and operational efficiency.