Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Change in Net Working Capital (NWC) Formula
- Cash Flow from Operations Ratio
- Cash Flow Per Share
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Days Sales Uncollected
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup Percentage Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula
Net Working Capital Formula
In simple terms, net working capital (NWC) denotes the short terms liquidity of a company. We can do the Net Working Capital Calculation simply by adding the current assets and deducting the current liabilities.
Let’s have a look at the formula for net working capital –
Example of Net Working Capital Formula
Let’s take a practical example of net working capital formula.
Tully Company has the following information –
- Sundry Creditors – $45,000
- Sundry Debtors – $55,000
- Inventories – $40,000
- Prepaid salaries – $15,000
- Outstanding advertisements – $5000
Find out the NWC of Tully Company.
In the above example, we have been given both current assets and current liabilities.
First, we need to separate the current assets from the current liabilities.
Then we need to total the current assets and also the current liabilities. And then we need to find the difference between the current assets and the current liabilities.
- Current Assets – Sundry Debtors, Inventories, Prepaid salaries.
- Current Liabilities – Sundry Creditors, Outstanding advertisements.
Total current assets = (Sundry Debtors + Inventories + Prepaid salaries) = ($55,000 + $40,000 – $15,000) = $110,000.
4.9 (1,067 ratings)
Total current liabilities = (Sundry Creditors + Outstanding advertisements) = ($45,000 + $5000) = $50,000.
The Net Working Capital Formula is –
Net Working Capital Calculation of Colgate
Below is the Balance Sheet Snapshot of Colgate’s 2016 and 2015 financials.
Let us do the Net Working Capital Calculation for Colgate
- Current Assets (2016) = 4,338
- Current Liabilities (2016) = 3,305
- NWC (2016) = 4,338 – 3,305 = $ 1,033 million
- Current Assets (2015) = 4,384
- Current Liabilities (2015) = 3,534
- NWC (2015) = 4,384 – 3,534 = $850 million
Explanation of Net Working Capital Formula
NWC is one of the most popular ratios investors use.
In this formula, there are two important elements.
The first element is the current assets. Current assets are those assets that can be liquidated within one year or less. That means current assets will pay you off for less than a year. We can give examples of current assets as sundry debtors, accounts receivables, inventories, prepaid salaries etc.
The second element is the current liabilities. Current liabilities are those liabilities that can be paid off for less than a year. The examples of current liabilities are sundry creditors, accounts payables, outstanding rent etc.
In this formula, we will calculate the difference between the total current assets and the total current liabilities for Net Working Capital Calculation.
Use of Net Working Capital Formula
If you look at current assets and current liabilities, you will find them on the balance sheet. Investors use NWC to know whether a company is liquid enough to pay off its short-term liabilities. That’s why NWC needs to be interpreted properly.
There are two ways through which we can interpret NWC
- When the NWC is positive, the investors can understand that the company has enough current assets to pay off its current liabilities.
- And when the NWC is negative, the investors can comprehend that the company doesn’t have enough assets to pay off its current liabilities.
Investors can also see the usefulness of NWC in calculating the free cash flow to firm and free cash flow to equity. But if there is an increase in the NWC, it isn’t considered as positive; rather it’s called negative cash flow. And obviously, this increased working capital is not available for equity.
Net Working Capital Calculator
You can use the following Net Working Capital Calculator
|Net Working Capital Formula =||Total Current Assets – Total Current Liabilities|
|0 – 0 =||0|
Net Working Capital Formula in Excel (with excel template)
Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Total Current Assets and Total Current Liabilities.
You can easily do the Net Working Capital Calculation in the template provided.
First, we need to separate the current assets from the current liabilities.
You can download this net working capital template here – Net Working Capital Excel Template
Net Working Capital Video
This has been a guide to Net working Capital Formula, examples along with practical illustrations. Here you also find Net Working Capital Calculator along with excel template download. You may also have a look at the following articles to learn more about Financial Ratio Analysis –