Monday, 8 July 2013

Working Capital'

Dictionary Says

Definition of 'Working Capital'

A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

Working Capital


This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.

Also known as "net working capital", or the "working capital ratio".

Investopedia Says

Investopedia explains 'Working Capital'

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. The worst-case scenario is bankruptcy. 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 (slow collection), 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.

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. 
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    Working capital
    Defined as the difference between current assets and current liabilities. There are some variations in how working capital is calculated. Variations include the treatment of short-term debt. In addition, current assets may or may not include cash and cash equivalents, depending on the company.
    Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

    Working Capital
    The amount of money a company has on hand, or will have, in a given year. Working capital is calculated by subtracting current liabilities from current assets. That is, one takes the value of all debts and obligations for the current year and subtracts that from the value of all cash and assets that might reasonably be converted into cash in the current year. This is a good measure of the short and medium-term financial health of a company, and may indicate by how much it can expand its operations without resorting to borrowing or another capital raising tactic. Working capital is also called operating assets or net current assets.
    Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

    working capital
    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. A high level of working capital indicates significant liquidity. Also called net current assets, net working capital. See also current ratio, quick ratio.
    Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved.

    Working capital. Working capital is the money that allows a corporation to function by providing cash to pay the bills and keep operations humming.
    One way to evaluate working capital is the extent to which current assets, which can be readily turned into cash, exceed current liabilities, which must be paid within one year.
    Some working capital is provided by earnings, but corporations can also get infusions of working capital by borrowing money, issuing bonds, and selling stock.
    Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.

    working capital
    The difference between cash and other quick assets (current assets) and current liabilities.
    The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.

    Working Capital
    What Does Working Capital Mean?
    A measure of a company's efficiency and short-term financial health; a company's working capital is calculated as shown here:
    Positive working capital means that the company is able to pay off its short-term liabilities, whereas negative working capital means that a company is unable to meet its short-term liabilities out of its current assets (cash, accounts receivable, and inventory). Working capital also is referred to as net working capital.
    Investopedia explains Working Capital
    If a company's current liabilities exceed its current assets, it may have trouble paying back its creditors in the short term. The worstcase scenario is bankruptcy. A declining working capital over a longer period should be a red flag to investors. For example, it could signal a decrease in a company's sales, and as a result, its accounts receivable (future cash flow) will shrink, meaning that future cash flows will be reduced. Working capital also reveals a company's operational efficiency. Money that is tied up in inventory or money that customers still owe (accounts receivable) cannot be used to pay off any of the company's current obligations. Therefore, if a company is not operating in the most efficient manner (slow collection), that will show up as an increase in working capital. This efficiency can be deduced by comparing working capital from one period to another; slow collection may signal an underlying problem in the company's operations.
    Related Terms:
    • Acid-Test Ratio
    • Capital Structure
    • Current Assets
    • Current Liabilities
    • Inventory

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