Does Net Working Capital Include a Company’s Short-Term Debt?

Does Net Working Capital Include a Company’s Short-Term Debt?

Working capital is the difference between a company’s current assets and current liabilities. Short-term debt has to be paid back by a company inside a year, so it is a current liability. Because working capital is arrived at by deducting current liabilities from assets, short-term debt actually reduces the former.

Short-Term Debt Considerations

In certain instances, a company does incur short-term debt when it borrows from creditors, but it promptly rolls over the debt balance as it becomes due by taking short-term credit once more. In this situation, an investor has to evaluate whether it is logical to assume that that company’s debt will once more be rolled over and, hence, exclude this balance due to the networking capital calculation.

Adjusted Working Capital Scenario

In certain cases, investors wish to consider only the current liabilities and assets, relating to the operations of a company, and exclude current accounts, having to do with its financing operations, like short-term debt. This is when the short-term debt of that company does not affect the calculation of its adjusted working capital.

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