A negative working capital(WC) means company does not enough cash for its day to day operations. WC is net of Current Assets & Current Liabilities i.e. (CA-CL).



0
When this net is negative means liabilities will further increase? Is it not a vicious cycle? So how do we say if the company is doing good or not? What else should be considered? Please clarify.

2 Answer(s)


0

Yes a negative capital means higher liabilities. In business such as retail this might be a good thing. Because this means that the company is running on someone else's money.

For example take a company like flipkart or amazon - they typically get 15-40 day credit from their suppliers. So this credit they get shows up as Accounts payables in the liability section. Within this 4o days flipkart/amazon will sell the product get the cash from the customer and pay off the liability. This is an example of how a negative working capital benefits the company.

0

One of things to look for is if the liabilities are short term accounts payable items or long term debt. Also another thing to look for is if the free cash flow for that period is enough to cover the short-term liabilities. If both these are true then the negative working capital is good. If the free cash flow cant cover the liability then the company is in trouble.