Investopedia: What is a 'Working Capital'?

Investopedia

Working Capital
Share
What is 'Working Capital'

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

Working Capital = 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. 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".
VIDEO
Unmute
BREAKING DOWN '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

Ready to take your knowledge of Working Capital to the next level? Read -- The Working Capital Position and Evaluating A Company's Capital Structure.
Days Working Capital
Share
Video Definition

Days working capital is an accounting and finance term used to describe how many days it takes for a company to convert its working capital into revenue. It can be used in ratio and fundamental analysis. When utilizing any ratio, it is important to consider how the company compares to similar companies in the same industry.
BREAKING DOWN 'Days Working Capital'


Days Working Capital

Working capital is a measure of liquidity, and days working capital is a measure that helps to quantify this liquidity. The more days a company has of working capital, the more time it takes to convert that working capital into sales. In other words, a high number is indicative of an inefficient company and vice versa.

Working Capital

Working capital is calculated by subtracting current liabilities from current assets. Current assets include cash, marketable securities, inventory, accounts receivable and other short-term assets to be used within the year. Current liabilities include accounts payable and the current portion of long-term debt. These are debts that are due within the year. The difference between the two represents the company's short-term need for, or surplus of, cash. A positive working capital balance means current assets cover current liabilities. A negative working capital balance means current liabilities are more than current assets.
Read More +

    Work With Investopedia
    About Us Advertise With Us Contact Us Careers

© 2018, Investopedia, LLC. Feedback All Rights Reserved Terms Of Use Privacy Policy