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