Working capital is the amount by which the value of a company's current assets exceeds its current liabilities. Also called net working capital. Sometimes the term "working capital" is used as synonym for "current assets" but more frequently as "net working capital", i.e. the amount of current assets that is in excess of current liabilities. Working capital is frequently used to measure a firm's ability to meet current obligations. It measures how much in liquid assets a company has available to build its business.
Working capital is a common measure of a company's liquidity, efficiency, and overall health.
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.
Both variables are shown on the balance sheet (statement of financial position).
Norms and Limits
The number can be positive (acceptable values) or negative (unsafe values), depending on how much debt the company is carrying. 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.
Companies with negative working capital may lack the funds necessary for growth. Analysts are sensitive to decreases in working capital; they suggest a company is becoming overleveraged, is struggling to maintain or grow sales, is paying bills too quickly, or is collecting receivables too slowly. Though in some businesses (such as grocery retail) working capital can be negative (such business is being partly funded by its suppliers).
Exact Formula in the ReadyRatios Analytic Software (based ontheIFRS statement format).
Working capital (net working capital) = F1[CurrentAssets] – F1[CurrentLiabilities]
F1 – Statement of financial position (IFRS).
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Most WantedFinancial Terms
- Debt-to-Equity Ratio
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- Return On Capital Employed (ROCE)
- Receivable Turnover Ratio
- Debt Service Coverage Ratio
- Debt Ratio
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