Please fill out the form below and we will get back to you as soon as possible.
Working Capital is a common measure of a company’s liquidity, efficiency, and overall health. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts, a company’s working capital reflects the results of a host of company activities, including inventory management, debt management, revenue collection, and payments to suppliers.
WORKING CAPITAL IS CALCULATED AS:
Working Capital = Current Assets – Current Liabilities
If a company’s current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term, in the worst case scenario would go bankrupt. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company’s sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.
Working capital also gives investors an idea of the company’s underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company’s obligations. So, if a company is not operating in the most efficient manner, it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company’s operations.
Positive working capital generally indicates that a company is able to pay off its short term liabilities almost immediately and Negative working capital generally indicates a company is unable to do so. This is the reason analysts are sensitive to decrease in working capital, they suggest a company is becoming overleveraged, and is struggling to maintain or grow sales, is paying bills too quickly, or is collecting receivables too slowly. Increases in working capital, on the other hand, suggest the opposite.