Net working capital (NWC) is also referred to as working capital and is a way to measure a company’s ability to pay off short-term liabilities. NWC is often used by business owners and accountants to quickly check a company’s financial health at any given moment. However, the results are sometimes difficult to interpret.
In this guide, we’ll go over:
- Net Working Capital Definition
- How to Calculate Net Working Capital
- Problems With Using NWC
- Showing You Understand NWC on Resumes
- Related Finance Calculations
Net Working Capital Definition
Net working capital, also called NWC or working capital, measures a company’s short-term financial health. NWC shows the difference between a company’s current assets and current liabilities, and the remaining dollar amount is the company’s working capital for the immediate future.
It’s important to remember that current assets or liabilities have a timeframe — current assets are readily available resources that can be converted to cash within a year, and current liabilities are debts due within one year.
These figures frequently change throughout the year, though. So, NWC is sometimes tracked periodically and graphed to show a company’s trends. On the other hand, some companies only occasionally use NWC to get a quick snapshot of the business’ health.
Who Uses Net Working Capital?
Small business owners use net working capital to better understand their company’s immediate financial health. Finance teams at large companies and corporations also commonly use NWC. Additionally, accountants can calculate and track NWC for clients with ease because accountants create financial statements that show the details needed for the NWC formula.
Understanding net working capital can be a useful tool for investors and lenders, too. Knowing how a company handles its short-term liabilities helps inform investing and lending decisions.
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How to Calculate Net Working Capital
You can calculate a company’s net working capital by subtracting its current liabilities from its current assets.
Net Working Capital Formula
Net Working Capital = Current Assets – Current Liabilities
Components of Working Capital Formula
A company’s current assets include any resources that could be liquidated (turned into cash) within one year. This includes things like:
- Checking and savings accounts
- Stocks and bonds
- Accounts receivable
A company’s current liabilities include money the company owes others that will be due within the following year. Current liabilities are often things such as:
- Accounts payable
- Short-term loans
- Deferred revenue (also called unearned income)
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NWC Calculation Example
Using the consolidated balance sheet (a type of financial statement) from Apple’s 2022 annual report, we can get the following information to calculate Apple’s net working capital:
- Apple’s total current assets for 2022: $135,405 million
- Apple’s total current liabilities for 2022: $153,982 million
So, we have a formula of:
Net Working Capital = $135,405m (assets) – $153,982m (liabilities)
Apple’s net working capital for 2022 was: -$18,577 million
Interpreting NWC Results
Based on the above example, Apple’s net working capital was negative for the end of the 2022 fiscal year. It is easy to assume that a negative NWC would mean the company has poor financial health and is at risk of going bankrupt, but we all know Apple isn’t on the verge of failure. So, what does a negative net working capital actually mean?
There are many reasons for a company to have negative working capital. For example, if a business has a good relationship with its lenders, it may have favorable loan terms that are not disclosed on the balance sheet. This means the company may have more time to pay the loans back or smaller payments due in the short-term than the balance sheet suggests. Also, for companies that recently invested in large projects or expansions or took on extra debt to handle operational growth, their net working capital can look bad at face value even though the company is growing and thriving.
Additionally, NWC changes often, and some companies have a seasonality to their business — one part of the year requires relying on financing, while another part is booming with profits.
Having positive working capital isn’t always a great plan, either. Too much working capital on hand may suggest the company is not properly investing money into new ventures, upgrades, or expansions.
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Problems With Using NWC
Understanding net working capital calculation results is a key issue with relying on NWC as a financial health metric. Ultimately, NWC does not account for lines of credit a company may have access to or recent large investments and purchases a company makes.
Beyond that, calculating NWC requires looking at current or liquid assets, but not all current assets are equally liquid. For example, inventory is a liquid and current asset, but it can take a long time to sell inventory — it isn’t a reliable source of cash to pay off short-term debts.
NWC is a valuable metric, but other factors should be considered, too, like the company’s capital structure, historical trends, and profit margins.
Showing You Understand NWC on Resumes
You have three key places you can talk about your familiarity with net working capital:
- Your resume’s skills section: You can mention skills in measuring business performance and financial health using metrics like revenue, quick ratios, and net working capital.
- Description of a job or internship: You can provide an example where you used NWC and other metrics to analyze and quantify a company’s financial performance.
- Your cover letter: You can elaborate on your experience with financial metrics or even describe instances outside of work or internships that demonstrate your abilities. For example, you could talk about helping a friend or family member figure out their small business’s financial health using metrics like working capital.
Related Finance Calculations
Careers in finance involve many formulas and calculations that help evaluate business performance. Some vital metrics and calculations to know include:
- Discounted cash flow (DCF) valuation
- The accounting equation
- EBITDA (earnings before interest, taxes, depreciation, and amortization)
- Current ratio
- Quick ratio
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