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MBS Financial, LLC Business Loan Weekly |
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August 2007 |
Volume 2, Number 16 |
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In
This Issue ·
Feature Article Broker Resources Featured
Sites Investment Recovery Trade Corporation Featured
Products Contact Us |
Working Capital: A measure of both a company’s efficiency
and its short-term financial health.
Positive working capital means
that the company is able to pay off its short-term liabilities. Negative
working capital means that a company currently is unable to meet its
short-term liabilities with its current assets (cash, accounts receivable,
inventory). Also known as “net working
capital”. If a company’s current assets do not exceed its current
liabilities, then it may run into trouble paying back creditors in the short
term. The worst case scenario is bankruptcy. A declining working capital
ratio over a longer time period is also a red flag that warrants further
analysis. For example, it could be that the company is being more aggressive
with its sales efforts and, as a result, is having a harder time collecting
on its receivables. Working capital also gives
investors an idea of the company’s underlying operational efficiency. Money
that is tied up in inventory or money that customers still owe to the company
cannot be used to pay off any of the company’s obligations. So, if a company
is not operating in the most efficient manner (slow collection), it will show
up in the working capital. This can be seen by comparing the working capital
from one period to another; slow collection may signal an underlying problem
in the company’s operations. |
