Analyzing the Working Capital of a Company
Analyzing the Working Capital of a Company
As working capital can vary widely from one business to another and over time, it is essential to analyze this financial metric in a broader context. A given business’s size, operational model, stage of growth, and the industry it is part of, should all be considered while assessing financial stability based on working capital (WC).
In some industries such as retail, high net working capital (NWC) is necessary in order to maintain smooth operations right through the year. In other industries, businesses can operate with rather low working capital and without incurring problems if they have a stable business model, and consistent finances and revenues. By consistent finances, experts mean stable funds that prove enough to meet operating expenses.
Current assets and liabilities change every day because they are based on a 12-month rolling period. Therefore, networking capital also changes gradually over time. A change in net working capital can be positive or negative. Changes in this financial metric from one year to the next are particularly important, as decreasing or increasing trends reveal more about the financial prospects of a company than anyone balance sheet figure in isolation.
