How to Calculate and Interpret a Company's Net Working Capital
A company's net working capital is the amount of money it has available to spend on its day-to-day business operations, such as paying short term bills and buying inventory. Net working capital equals a company's total current assets minus its total current liabilities. Current assets are resources, such as cash and accounts receivable, that a company expects to use up or convert to cash within a year. Current liabilities are amounts of money, such as accounts payable, that a company owes to others and expects to pay within a year. Having more net working capital helps a company run its business.
Identify the "Total Current Assets" line item in the "Assets" section of a company's balance sheet and determine the amount listed next to the description. For example, assume a company's total current assets are $30,000.
Identify the "Total Current Liabilities" line item in the "Liabilities" section of the company's balance sheet and determine its amount. In this example, assume the company's total current liabilities are $10,000.
Subtract the company's total current liabilities from its total current assets to calculate its net working capital. In this example, subtract $10,000 from $30,000 to get $20,000 in net working capital.
Identify whether the company's net working capital is positive or negative. A positive result means the company has enough current assets and money left over after paying its current liabilities. A negative result means the company does not have enough current assets to pay its current liabilities, which means it may need additional funds. In this example, the company's net working capital is positive, which means it has enough to cover its short-term bills and has $20,000 available to spend on growing its business.
Compare the amount of the company's net working capital with that of others in its industry to determine its competitive position. With all else being equal, a company with more net working capital has more flexibility to spend on growing its business. In this example, if the company's three competitors have $10,000, $9,000 and $12,500 in net working capital, the subject company, with $20,000 in net working capital, has more net working capital and a potential competitive advantage with the ability to spend more money.