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Net working capital

Net working capital

Description

Net working capital is a financial metric which represents the amount, by which the value of a company's current assets exceeds its current liabilities. Data, needed to calculate this ratio is collected from the balance sheet. It is a very commonly used measure of the company’s liquidity. In conjunction with other financial ratios, net working capital indicates how well company manages its short-term debts and uses current assets.

Norms and limitations

Negative value of the working capital indicates a great risk for the company to be unable to meet its short-term liabilities, on the other hand the positive value of this measure shows company’s ability to pay off its short-term liabilities.

Constantly decreasing NWC can indicate that the company is starting to face some problems when covering its short-term debts. However in some cases a decrease of this measure may show that the company manages its short-term assets and liabilities more efficiently. So it is useful to compare the working capital from one period to another.

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