Gross Working Capital

What Is Gross Working Capital?

Gross working capital is the sum of a company's current assets (assets that are convertible to cash in no less than a year or less). Gross working capital incorporates assets, for example, cash, accounts receivable, inventory, short-term investments, and marketable securities. Gross working capital less current liabilities is equivalent to net working capital, or just "working capital;" a more helpful measure for balance sheet analysis.

Figuring out Gross Working Capital

Gross working capital, in practice, isn't helpful. It is just one half of an image of a company's short-term financial wellbeing and the ability to utilize short-term resources productively. The other half is current liabilities. Gross working capital, or current assets, less current liabilities, likens to working capital. While working capital is positive, it means that current assets are greater than current liabilities. The preferred method for expressing positive working capital is the ratio of current assets to current liabilities (e.g., > 1.0).

In the event that this ratio is under 1.0, a company might experience difficulty paying back its creditors in the short term. Negative working capital is when liabilities overwhelm assets and demonstrate that a company might be in distress. A company needs just the right amount of working capital to ideally function.

With too much working capital, a few current assets would be better put to utilize somewhere else. With too minimal working capital, a company will be unable to meet its everyday cash requirements. Managers aim for the right balance through working capital management.

A few methods where a company can further develop its working capital ratio remember a reduction for time to collect receivables from customers, expanding payable time spans with providers, a reduction on the dependence on short-term debt, and fittingly overseeing inventory levels.

Illustration of Gross Working Capital

An examination of gross working capital versus current liabilities gives numerous bits of knowledge into a company's operations. The changes in the parts of current assets and liabilities from one period to another can lead to additional analysis to survey the short-run financial condition of a company. In some cases there might be a surprise to an investor that a working capital ratio fell below 1.0. Breaking down the parts and following the money would make sense of why.

For instance, Company ABC reported gross working capital of $7 billion toward the finish of the fourth quarter of 2019, versus $7.23 billion in current liabilities, for a working capital ratio of 0.97. The bulk of current liabilities is coming from the short-term debt of $3 billion.

Toward the finish of the second from last quarter of 2020, ABC had paid off its whole $3 billion in debt, without assuming more debt. Gross working capital stood at $7.8 billion and current liabilities stood at $5 billion, bringing about a working capital ratio of 1.56. Between the finish of 2019 and September 2020, the company repaid its short-term debt, subsequently diminishing current liabilities and sending the working capital ratio serenely above 1.0.

Features

• Counting current liabilities into the equation brings about computing working capital, which is a true image of a company's liquidity and its ability to meet its short-term obligations.
• Accounts receivable, inventory, and marketable securities are instances of gross working capital.
• Gross working capital is the total value of a company's current assets.
• All alone, gross working capital isn't helpful, as it doesn't give a full image of a company's liquidity.