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As an analyst, what represents for you, a negative working capital? What explanation can you give?

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Question added by Nadjib RABAHI , Freelancer , My own account
Date Posted: 2016/04/14
Mohammad Iqbal Abubaker
by Mohammad Iqbal Abubaker , Jahaca Pty Ltd - Accounts Administrator , Jahaca Pty Ltd - Accounts Administrator

Working capital can be negative if a company's current assets are less than its current liabilities. Working capital is calculated as the difference between a company's current assets and current liabilities. If a company's current assets substantially decrease as a result of a large one-time cash payment, or current liabilities increase due to significant credit extension resulting in an increase in accounts payable, its working capital may turn negative.

 

Working Capital

Working capital represents what a company currently has to finance its immediate operational needs, such as obligations to its vendors for extending credit on purchases of various goods and services to be used in the production process, inventory, cash balance and accounts receivable. Prepaid expenses are also part of working capital. When conducting valuations, certain investment professionals consider adjusted non-cash working capital that does not include cash and cash equivalents, short-term investments, and any loans and debt payments coming due within a year.

 

Negative Working Capital

Negative working capital is closely tied to the concept of current ratio, which is calculated as a company's current assets divided by its current liabilities. If a current ratio is less than 1, the current liabilities exceed the current assets and the working capital is negative. If working capital is temporarily negative, it typically indicates that the company may have incurred a large cash outlay or a substantial increase in its accounts payable as a result of a large purchase of products and services from its vendors. However, if the working capital is negative for an extended period of time, it may be a cause of concern for certain types of companies, indicating that they struggle to make ends meet and have to rely on borrowing or stock issuances to finance their working capital.

 

Hisham Ahamed
by Hisham Ahamed , Senior Financial Analyst , Aldara Hospital & Medical Center

A company with negative working capital is a great business model as this means the company doesn't need to raise additional funds for working capital.  In such companies, short term investments (current assets) are financed by creditors and customers (advance received) without any cost. This will help to bring down the capital requirement for the business and in addition would also have a positive effect on the bottom line specially if the working capital has to be financed through debt.

Dasarathi Rath
by Dasarathi Rath , Sr. Accountant , Al Luban Special Investment LLC

The cost of providing credit to customers and holding stock can be represented a substantial proportion of a firm profit. collect receivable faster,,, Then you realise cash from cycle, you can negotiate improve term with suppliers, for example :- get longer credit or an increase credit limit, you are effectively creating free finance to help fund future sales,

Negative Working capital means cash outflows into the working capital funding. The reasoning for same is working capital cycle is more than the business period. The cash required for inventory and accounts receivable offset by accounts payable is taking more time to get back

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