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.