4.1.1. Working capital

The Working capital correspond to the difference between current assets and current liabilities. It can also be calculated as the difference between the permanent and the noncurrent assets.

  • \(Net\ Working\ capital=Permanent\ capital-noncurrent\ assets\)
  • \(Net\ Working\ capital=Current\ assets-current\ liailities\)

The net working capital helps you to understand the current position of the company, as it is an indicator of the company position on a short term:

If positive, it means that the company has more short-term assets than short-term liabilities. It means Operating assets and Treasury are being partly financed through the Permanent financing. If negative, it means that the company will have more short-term liabilities than short-term assets, to be able to pay it short-term liabilities within due time. Thus, a negative net working capital should be taken as a warning regarding the company’s ability to comply with its obligations in the near future even it is known that both the current assets and current liabilities rotate.

The net working capital analysis identifies potential financial difficulties that the company may face in the future. A company can be profitable and viable from an economic perspective , but may be at risk if the position of the net working capital is too negative, because the company will have no liquidity to meet its obligations. The solution normally goes through increased financing of the company, whether through equity increase or debt (as a bank loan). If the option is to increase the debt and the company’s leverage is high, it will likely incur in higher interest rates. Another common approach is a lengthening of the payments to suppliers and other creditors: a negative working capital is a warning to external stakeholders.

Consider some items that were extracted from DFI’s balance sheet:

Values in EUR
2020 2021 2022 2023 2024
Current assets 148 131,29 1 026 339,69 2 321 331,19 4 869 230,98 9 120 978,46
Current liabilities 193 510,78 801 104,23 1 687 673,67 2 755 238,33 4 246 202,37
Working capital -45 379,49  225 235,46  633 657,52  2 113 992,65  4 874 776,09

In 2020, DFI has current assets of 148 131,29€ and current liabilities 193 510,78€. The Net Working Capital is

  • \(Working\ Capital=148\ 131,29-193\ 510,78= -45\ 379,49€ \)

In 2020 DFI presents a negative NWC, which indicates that the company has more short-term liabilities than short-term assets and, consequently, it may have some difficulty to comply with its obligations. However, this situation is corrected from 2021 on; the short-term assets grow and become more than the short-term liabilities, allowing the company to recover its ability to pay short term debts.

Example case: Golden Days

Consider some items that were extracted from Golden Days’ balance sheet:

Values in USD 2019 2020 2021 2022 2023
Current assets 132 602,39 369 230,24 770 755,60 1 016 934,44 1 317 923,41
Current liabilities 24 712,32 59 135,81 187 004,89 225 306,77 268 746,66
Working capital 107 890,07 310 094,43 583 750,71 791 627,67 1 049 176,75

Golden Days presents a positive Net Working Capital in all the five years of the project, meaning that it always has more short-term assets than short term liabilities.

Let’s consider, for example, the year of 2020:

  • \(Working\ Capital=369\ 230,24-59\ 135,81=310\ 094,43$\)

As we can observe, the short-term assets have a much bigger value than the short-term liabilities, which allows the company to easily comply with its short-term obligations and have a stable financial position.