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Working capital

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Working capital
A measure of both a company's efficiency and its Short-term financial health.
    
It is the difference between current assets and current liabilities. Also known as "net working capital".
    
Contrasted with capital, a permanent use of funds, working capital cycles through your business in a variety of forms: inventories, accounts, and Notes receivables, and Cash and securities.

Positive working capital means that the company is able to pay off its Short-term liabilities. Negative working capital means that a company currently is unable to meet its Short-term liabilities with its current assets (Cash, accounts receivable and inventory).
    
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.
Posted by  Spintelligent (Pty) Ltd
 
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