What Does Low Net Working Capital Indicate about your Financial Prospects?
Low networking capital usually means that a company is merely scraping by and has just about enough funds to cover short-term expenses. In some cases, however, a company with a solid business model that knows just how much it requires to run smoothly might simply have low net working capital as it has already invested surplus cash to fund growth projects or to generate investment income towards increasing its total value.
Because the interpretation of working capital can vary widely, it is very essential to consider this financial metric within a historical context, i.e., by paying attention to patterns of decreasing or increasing figures over time. Apart from that, it is important to compare a business’s working capital to that of other similar companies in the same segment to make sure of an accurate and fair analysis of the former’s operational efficiency.
Working capital is the difference between a company’s current assets and liabilities. It is not reasonable to expect it to remain very high from the start and to the end of a company’s journey. Do you own a small company? If so, then pay attention to how it manages working capital from time to time.