Working Capital & Debit to Equity Ratio

How do we ascertain the position of a Company if the Working Capital is negative? Should we consider other factors also like the debt to equity ratio and return on net worth before coming to a conclusion?

There may be a large number of companies where the Current Assets that is Cash position may not be sufficient compared to the funds required daily to run the business( in view of not blocking liquid cash) but may be using limits i.e. Cash Credit from Banks, in that case how do we determine the Working Capital?

How useful is the Debt to Equity Ratio while we analyse a B/S and why is it important?

1 Answer(s)


The Debt/Equity ratio is very important to understand if the company is efficiently using capital. Higher the ratio , more debt the company is taking and hence greater ROI. Obviously for every industry there is a limit to the D/E ratio after which it becomes unviable to pay down the debt.

In case of cash credit from banks it will show up under Current Liabilities. Any company with a large enough cash credit line from a bank will have a negative working capital since the companies operations is being run on banks money. This is the same as getting inventory from a supplier on credit for 30 days.