What is Gross Working Capital?
Gross working capital refers to the total current assets of the company, i.e., all the assets of the company that can be converted into cash within a year and examples of which include accounts receivables, inventory of raw material, WIP inventory, finished goods inventory, cash, and bank balance, marketable securities such as T-Bills, commercial paper, etc. and short term investments.
- It is difficult to ascertain the liquidity position of the company by gross working capital. It is because it only considers the capital invested in the business for the short term, which can liquidate into cash within a year.
- It does not account for the short term financial obligations such as payments due to the supplier of the raw material, or outstanding wages to the labor, or any other payment which is due on the company. Thus, to the liquidity of the company, we need to consider the net-working capital.
Formula
Gross vs. Net Working Capital
As we have understood so far that the Gross Working Capital is the sum of all the current assets of the company, which can be liquidated within one year;
On the other hand, Net working capital is the difference between current assets and the current financial obligation of the company.
We calculate Net-working capital as:
Net-Working Capital = Current Assets – Current Liabilities
Net-working capital indicates whether the company has sufficient funds to meet its short term financial obligations, also known as current liabilities. When the value of the company’s current assets is higher than the company’s current liabilities, it specifies a positive net working capital. It means the company has a sound liquidity position by having more assets to meet its liability. Contrarily, the negative net-working indicates the company’s inability to meet its short term financial obligations due to insufficient current assets.
Example
Here are the excerpts of Apple Inc. from the annual 10k filing with US Securities and Exchange Commission:
4.9 (1,067 ratings) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
Source: www.sec.gov
Based on the reported numbers, we can calculate the Gross working capital of Apple Inc. by adding all the current assets of the company.
Hence, the current assets of the company for the year ending Sept 2019 is worth the US $ 162,819 million.
Also, the company has short term obligations of US $ 105,718 million.
Thus the net-working capital of the company is the US $ 57,101 million (Current Assets minus Current Liabilities. It indicates a healthy liquidity position of the Company as for every US $ 1 of financial obligation; the Company has 1.5 of value in total assets.
Significance
It does not represent the complete picture of the company’s liquidity and solvency position. Hence, it is not of much significance. However, analyzing the company’s Net-working capital is of great importance as it signals about the ability of the company to meet its short term financial obligations.
Conclusion
Gross Working Capital is mainly the total of the Company’s current assets, including account receivable, cash and cash equivalent, marketable securities, inventories, and other current assets that can be converted into cash within a year. If we reduce the short term financial obligations of the company from the gross working capital, we get the value of the net-working capital of the company.
Recommended Articles
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