Working capital or net working determine the operational efficiency and ability of the company to pay its short term obligation. The value of working capital is equal to current assets minus current liabilities as mentioned below.
Working Capital or Net Working Capital = Current Assets – Current Liabilities
Increase in working capital value show positive indication which means company current assets are greater than current liabilities so it can easily meet its short term obligations. Secondly greater value of working capital shows operational efficiency of the company.
The operational efficiency can be determine the sales turnover and converting the account receivable into cash within a shorter period of time. Vice versa negative value of working capital indicates the danger signal to the company because the company obligation are greater than current assets and it cannot payback the liabilities of creditors on time. These types of situation will leads the company towards the bankruptcy.
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