Working Capital is money available to a company for day-to-day operations.
W.C = Current Assets – Current Liabilities
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. 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 paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining also gives investors an idea of the company’s underlying operational efficiency. Money that is of debt due within one year, and other short-term accounts.
If a company’s current assets do not exceed its current liabilities, then it may run into trouble 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 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.
Things to Remember
- If the ratio is less than one then they have negative working capital.
- A high working capital ratio isn’t always a good thing, it could indicate that they have too much inventory or they are not investing their excess cash
- Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as “net working capital”.
