Net working capital :
Net working capital Firm's investment in current assets
Current assets
-(Current liabilities)
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Net Working Capital
A quick glance… :
A quick glance… Current Assets Current Liabilities Net Working Capital (+ve) Long Term Financing Net Working Capital (-ve) Fixed Assets
Importance of NWC :
Importance of NWC Conserve company’s cash/funds
Companies can fail even though they are profitable.
Technical insolvency will arise
May lead to company facing financial crisis
E.g. SO EMBARASSING private limited.
Example: SO Embarrassing Pte Ltd :
Example: SO Embarrassing Pte Ltd
Example: SO Embarrassing Pte Ltd :
Example: SO Embarrassing Pte Ltd NWC= Total Current Assets- Total Current Liabilities
= $52 000- $100,000
=-$48,000 -$48,000 is a negative net working capital.
This means that the company is financing its fixed assets with current liabilities.
This company has a very high risk of technical insolvency.
Working Capital Ratio :
Working Capital Ratio Ideal ratio for Current Assets : Current liabilities is 2:1.
This may differ from industry to industry.
At So Embarrassing Pte Ltd, the working capital ratio is 0.52: 1
This is a very unhealthy ratio.
Low costing current liabilities = higher profits
High risk of technical insolvency