Ratio Analysis Tutorial

- Ratio Analysis of Financial Statements
- Liquidity Ratios
- Turnover Ratios
- Profitability Ratios
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Total Assets (ROA)
- Return on Average Capital 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
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Expense Ratios

**Net Working Capital Formula** (Table of Contents)

## Net Working Capital Formula

In simple terms, net working capital (NWC) denotes the short terms liquidity of a company. We can calculate NWC simply by adding the current assets and deducting the current liabilities.

Let’s have a look at the formula of 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.

Total current liabilities = (Sundry Creditors + Outstanding advertisements) = ($45,000 + $5000) = $50,000.

The NWC Formula is –

- Total Current Assets – Total Current Liabilities = $110,000 – $50,000 = $60,000.

**Recommended Courses**

### Net Working Capital Calculation of Colgate

Below is the Balance Sheet Snapshot of Colgate’s 2016 and 2015 financials.

Let us calculate Net working Capital for Colgate

NWC (2016)

- Current Assets (2016) = 4,338
- Current Liabilities (2016) = 3,305
- NWC (2016) = 4,338 – 3,305 = $ 1,033 million

NWC (2015)

- 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 to calculate NWC.

### Use of Net Working Capital (NWC) 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 Formula Calculator**

You can use the following Net Working Capital Formula Calculator

Total Current Assets | |

Total Current Liabilities | |

Net Working Capital Formula = | |

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 calculate the NWC 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

### Recommended Articles:

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 –

- Working Capital Ratio | Formula | Management | Financing
- Current Ratio Calculator
- Quick Ratio | Acid Test Ratio | Formula | Top Industry Examples
- Current Ratio Meaning
- Quick Ratio vs Current Ratio

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