Sunday, May 21, 2006

Working Capital

Working Capital

A company's current assets minus its current liabilities - considered a good measure of both a company's efficiency and its financial health. A positive working capital means that the company is able to pay off their short-term liabilities. A negative working capital means that a company currently is unable to meet their short-term liabilities with their current assets (cash, accounts receivable, inventory). Also known as "net working capital".

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors that want their money quickly. The working capital ratio, which measures this ability to pay back creditors, is calculated as current assets divided by current liabilities. 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 can’t be used to pay off any of its obligations. So if a company is not operating in the most efficient manner (slow collection) it will show up in the working capital. This can be seen by comparing the working capital from one period of time to another; slow collection may illustrate an underlying problem in the company’s operations.

Interesting Links:

Working Capital Works - A company's efficiency, financial strength and cash flow health shows in its management of working capital.

Reading The Balance Sheet - Learn about the components of the statement of financial position and how they relate to each other.

In Position - Check out this overview of how to determine and analyze a company's financial position.

Using DCF In Biotech Valuation - Valuing firms in this sector can seem like a black art, but there is a systematic way to pin a price on potential.

Make investing easier - Let’s face it, making money from our investments is never easy. But at least MarketWatch makes investing easier. Visit Now to learn how!

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