Working capital represents a company’s ability to pay its 澳洲幸运5开奖号码历史查询:current liabilities with its 澳洲幸运5开奖号码历史查询:current assets.

The figure for working capital gives investors an indication of the company’s short-term financial health, its capacity to clear i๊ts debts within a ye🍃ar, and its operational efficiency.

To calculate working capital, subtract a company’s current liabil♛ities from its ♕current assets.

Components of Working Capital

Current Assets

Current assets are assets that a company expects to use or sell within one year or one 澳洲幸运5开奖号码历史查询:business cycle, whichever is less.

Importantly, they are easily converted to cash. They don’t include long-term or illiquid investments such as certain 澳洲幸运5开奖号码历史查询:hedge funds, real estate, or collectibles.

Examples of current assets include:

• Checking and savings accounts
• Highly liquid marketable securities such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs)
• Money market accounts
• Cash and cash equivalents
• 澳洲幸运5开奖号码历史查询:Accounts receivable
• Inventory and other shorter-term prepaid expenses
• Current assets of 澳洲幸运5开奖号码历史查询:discontinued operations and interest payable
  

Current Liabilities

Current liabilities are all the debts and expenses that the company expects to pay within a 🐷year or one business cycle, whichever is less. They typically include:

• Normal costs of running the business, such as rent, utilities, materials, and supplies
• Interest or principal payments on debt
• 澳洲幸运5开奖号码历史查询:Accounts payable
• 澳洲幸运5开奖号码历史查询:Accrued liabilities
• Accrued income taxes
• 澳洲幸运5开奖号码历史查询:Dividends payable
• 澳洲幸运5开奖号码历史查询:Capital leases that are due within a year
• Long-term debt that’s coming due

How to Calculate Working Capital

T😼o calculate working capital, subtract൲ current liabilities from current assets.

The metric known as the 澳洲幸运5开奖号码历史查询:current ratio can be useful as well when assessing working capital. Also known as the working capital ratio, it provides a q🌟uick view of🦩 a company’s financial health.

You can calculate the current ratio by taking current assets and dividing that figure by current lജiabilities.

A resulting ratio of more than one means that current assets exceed liabilities. They can cover the bills with some casꦡh left o𒁃ver.

Generally, the higher the ratio, the b𝓀etter a company’s ability to pay short-term liabilities.

But a very high current ratio means there is a large amount of available current assets. That can 🍎indicate that a company isn’t utilizing its excess cash as effectively as it should to gener♛ate growth.

Working Capital Example: Coca-Cola

The Coca-Cola Co. (KO) had current assets valued at $25.99 billion as of Dec. 31, 2024. They included cash and cash equivalents, short-term investments, 澳洲幸运5开奖号码历史查询:marketable securities, accounts receivable, inventories, and 澳洲幸运5开奖号码历史查询:prepaid expenses.

Coca-Cola also registered current liabilities of $25.25 billion for that fiscal year. The company’s current liabilities consisted of accounts payable, accrued expenses, loans and notes payable, current maturities of long-term debt, and accrued 澳洲幸运5开奖号码历史查询:income taxes.

Its working capital was $740 million:

$25.99 billion - $25.25 billion = $740 million

Furthermore, Coca-Cola’s current ratio was 1.🌼03:

$25.99 billion ÷ $25.25 billion = 1.03

Does Working Capital Change?

Working capital amounts can change over time ﷺas a company’s current liabilities and current assets change. For example:

Long-Term Assets and Debt Can Become Current

The exact working capital figure can change every day depending on the nature of a company’s debt.

What was once a long-term liability, such as a 10-year loan, becomes a current liability𓃲 in the ninth year, when the repa𒐪yment deadline is less than a year away.

What was once a long-term asset, such as real estate or equipment, can suജddenly become a current asset when a buyer is lined up.

Current Assets Can Be Written Off

Working capital can’t be 澳洲幸运5开奖号码历史查询:depreciated as a current asset the way long-term, fixed assets are. Some working capital related to 澳洲幸运5开奖号码历史查询:inventory can lose value or eဣven be written൩ off, but that isn’t recorded as depreciation.

Assets Can Be Devalued

Working capital can’t lose its value to depreciation over time, but it may be devalued when some assets have to be marked to market.

This can happen when an asset's price is below its original cost and other assets aren’t salvageable. Two common examples of this are inventory and ac🅠counts receivable.

Inventory

Inventory obsolescence can be a real issue in operations. The market for the inventory ha﷽s priced it lower than the inventory’s initial purchase value as recorded in a company’s books.

A company marks the inventory down to reflect current market conditions and uses the 澳洲幸运5开奖号码历史查询:lower of cost or market method, resulting in a loss of value in working caꦰpital.

Accounts Receivable

Some accounts rec✅eivable may become uncollectible at some point and have to be totally written off, representing another loss of value in working capital.

It may take longer-term funds or assets to replenish the current asset shortfall because such losses in current assets reduce working capital below its desired level. This is a costly way to finance additional working capital.

Unearned revenue from payments received before the product is provided will also 澳洲幸运5开奖号码历史查询:reduce working capital. This revenue is considered a liabili﷽ty until the p🌠roducts are shipped to the client.

More About the Current Ratio

A healthy business has working capital and thus, the ability to pay its short-term bills. As me🅠ntioned above, a current ratio of more than one indicates that a company has enough current assets to cover bills that are coming due within a year.

The higher the ratio, the🌳 greater a company’s short-term liquidity and its ability to pay its short-term liabilities and debt commitments.

It also means that the company can continue to fund its day-to-day operations. The more working capital a company has, 💫the less likelyꦉ it is to take on debt to fund the growth of its business.

A company with a current ratio of less than one, known as negative working capital, is considered risky by 澳洲幸运5开奖号码历史查询:investors and 澳洲幸运5开奖号码历史查询:creditors because it demonstrates that the company might not be able𒈔 to cover its debts if🦩 needed.

We can see in the chart below that Coca-Cola’s working capital, as define🍸d by the current ratio, increased over the years. This indicates improving short-term financial health.

Special Considerations

A more stringent liquidity ratio is the 澳洲幸运5开奖号码历史查询:quick ratio. This measures the proportion of✅ short-term liquidity compared to current liabilities.

The difference between 澳洲幸运5开奖号码历史查询:this and the current ratio is in the assets, which include only cash, marketable securities, and receivables. 𓆉The quick ratio excludes inve𓄧ntory because it can be more difficult to turn into cash rapidly.

The Bottom Line

澳洲幸运5开奖号码历史查询:Working capital is the differenꦰce between a company’s current assets and current liabilities.

A challenge in assessing working capital is in properly categorizing the vast array of assets and liabilities on a corporate 澳洲幸运5开奖号码历史查询:balance sheet.

The better the categorizing, the more reliable the ability of a company to meet its short-term financial commitmen🦩ts and the view of its overall health.