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Working Capital interpretation

Working capital is a financial measurement of the operating liquidity available to a business.
It is also known as net working capital or working capital ratio. Working capital formula is:

Working capital formula

Positive working capital means that the business is able to pay off its short-term liabilities. Also, a high working capital can be a signal that the company might be able to expand its operations.

Negative working capital means that the business currently is unable to meet its short-term liabilities with its current assets. Therefore, an immediate increase in sales or additional capital into the company is necessary in order to continue its operations.

Working capital also gives an idea of company's efficiency. Money tied up in inventory or accounts receivable cannot pay off any of the company's short term financial obligations. Therefore, working capital analysis is very important, but very complex too. For example, an increase in working capital can be explained by sales increase, but can also be explained by slow collection or inadequate increase in inventory.

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