Working Capital is one of the most popular and important balance sheet figures, providing an indication of a company's ability to meet current obligations and overall health.
Working Capital is one of the most popular and important balance sheet figures, providing an indication of a company's ability to meet current obligations and overall health. Working capital is also referred to as net working capital, i.e. the amount of current assets that is in excess of current liabilities.
Calculation of Working Capital
Working capital is the amount by which the value of a company's current assets exceeds its current liabilities. Both figures are provided on the company balance sheet.
Working Capital Interpretation
Positive working capital generally indicates that a company is able to pay off its short-term liabilities almost immediately. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations.
Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between an entity's short-term assets (inventories, accounts receivable, cash) and its short-term liabilities.
Companies with negative working capital may lack the funds necessary for growth. Analysts are sensitive to decreases in working capital, suggesting that the company is struggling to maintain or grow sales, is paying bills too quickly, or is collecting receivables too slowly. Negative working capital can be an acceptable situation when a business is being partly funded by its suppliers such as grocery retail.