Working Capital : Complete Explanation of a Pillar Topic

working capital explanation

Working Capital is a key concept of Investment Banking which involves great interest from investors. Working Capital is a quantifiable measure of company’s growth and efficiency. When an investor or an investment firm looks to invest into another firm or organisation, working capital plays a major role. Working Capital is often used interchangeably with short-term financial health.

Working Capital : How it is calculated?

In order to calculate working capital, we need to consider two key values i.e. current assets and current liabilities. The formula used is simply their difference:

Working Capital = Current Assets – Current Liabilities

There is another concept called Working Capital Ratio (Current Assets/ Current Liabilities) and is commonly confused with Working Capital.

Working Capital : How to Analyse?

Once we get working capital value, we see it on a scale. If the value is less than 1, it is called as negative working capital. If the value is more than 2, it is also considered that company is not investing much in assets.

Anything in the range of 1.2 to 1.8 is considered to be optimum and great variable to growth. It is often termed as Net Working Capital.

If the company is having negative working capital, it might have tough time. In fact, most of the such situations leads to bankruptcy.

Working Capital and Trading Investment

Trading of a security (if listed) is closely related to its working capital. If company is leading to negative working capital, we see short-sell trading in market. This means that market predicts the price to go further down. However, the risk with such entities is always involved as nothing can be predict after an extent.

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