Liquidating net working capital
An increase in net working capital is considered a negative cash flow and not available for equity.In other words, an increasing requirement for capital for short term operations in the company is not available to equity.Despite conventional wisdom, as a stand-alone number, a company's current position has little or no relevance to an assessment of its liquidity.Nevertheless, this number is prominently reported in corporate financial communications such as the annual report and also by investment research services.The variables of the net working capital formula are the same as those used in the current ratio.The current ratio formula instead divides current assets by current liabilities.Most believe that a ratio between 1.2 and 2.0 is sufficient. 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. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis.
Net working capital is used in various other financial formulas that deal with cash flows.
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.
The formula for net working capital (NWC), sometimes referred to as simply working capital, is used to determine the availability of a company's liquid assets by subtracting its current liabilities.
Current Assets are the assets that are available within 12 months.