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 Liquidity Liquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read moreof the company, we need to consider the net-working capitalNet-working CapitalThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities.read more.
Formula
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For eg:
Source: Gross Working Capital (wallstreetmojo.com)
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 companyCurrent Assets Of The CompanyCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more, 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 liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more. 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 filingAnnual 10k FilingPublic firms in the United States of America file Form 10-K. It is a detailed statement of the company's annual financial performance that is filed with the Securities and Exchange Commission (SEC) within 60 days of the end of the fiscal year.read more with US Securities and Exchange Commission:
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 positionSolvency PositionSolvency of a company means its ability to meet the long term financial commitments, continue its operation in the foreseeable future and achieve long term growth. It indicates that the entity will conduct its business with ease.read more. 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 securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more, 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.
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