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Net working capital

Method of calculation

Formula for net working capital (NWC): current assets - short-term liabilities

Ratio's description

This ratio complements the assessment of company's financial liquidity seen from the static viewpoint. It indicates the level of fixed capital (created by equity and long-term liabilities) engaged in the financing of the current assets. The net working capital (NWC) can be at one of three levels:

  • positive net working capital, i.e. NWC > 0, which occurs when current assets > short-term liabilities
  • zero net working capital, i.e. NWC = 0, which occurs when current assets = short-term liabilities
  • negative net working capital, i.e. NWC < 0, which occurs when current assets < short-term liabilities

Ratio's interpretation

  • Ratio does not have reference values, however, from the perspective of financial liquidity, values close to zero or below zero are perceived negatively (except for trade industry).
  • When assessing the changes in the ratio's value over time (over few periods), from the perspective of financial liquidity:
    • the increase of the ratio's value is assessed positively (improvement of financial liquidity)
    • the decrease of the ratio's value is assessed negatively (deterioration of financial liquidity)

WARNING! If NWC is positive, the analysis should be complemented with the evaluation of the net working capital to current assets ratio

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