Working capital is defined as current assets minus current liabilities. Current means the asset will be turned to cash or used within one year. Likewise, it also means the liability will be paid off within the year. The calculation of working capital is often used by investment analysts as a way to measure the efficiency of a company's management and operations.
Working capital can help investment analysts to measure and compare operational performance between one company and another. A company with a positive working capital measure is able to pay off short-term assets with short-term liabilities. This is considered a good thing. Likewise, a company with negative working capital is unable to meet short-term liabilities with current assets.
Current Assets & Liabilites
Current assets and liabilities are listed first on the balance sheet. That is, current assets are listed before all other assets and current liabilities are listed before all other liabilities. Current assets include cash, accounts receivable and inventory. Current liabilities include accounts payable and other short-term loans, such as line of credit.
One way investment analysts measure and compare company size is by looking at the value of assets. This is because companies with more assets than others tend to have a lower cost of capital or financing costs. Assets are listed on the balance sheet, and comparing assets with total net working capital allows the analyst to compare the company's operational efficiency with its relative size in the market.
The net working capital to total assets ratio is expressed as a percentage of total assets. The calculation is current asset minus current liabilities divided by total assets. This number is then multiplied by 100 in order to arrive at the final ratio. A positive ratio is considered to be a sign of strength, and a negative ratio is considered to be a sign of weakness.
James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.