What is Working Capital?
Working capital is a liquidity measure that describes how much more current assets a company owns compared to its current liabilities.
How to Calculate Working Capital
Working capital is calculated by subtracting current liabilities from current assets. Both are reported on a company’s balance sheet.
How to Interpret Working Capital
Working capital can either be negative, zero, or positive, representing three different scenarios:
- Liquidity Issues: A negative working capital suggests that a company will likely have liquidity problems in the short-term since its current liabilities exceed its current assets. If incoming cash from operations cannot make up for the gap, the company might have to come up with additional financing.
- Break-Even Liquidity: A working capital of 0 means that current assets and current liabilities are equal and is equivalent to a current ratio of 1.
- Excellent Liquidity: A positive working capital means that a company’s current assets exceed its current liabilities, so the probability of the company running into liquidity issues is small.
