Working Capital
Working Capital · Net Working Capital
The difference between current assets and current liabilities — measures the company's ability to cover short-term obligations from operating activities.
What it is
Working Capital (WC) = Current Assets − Current Liabilities
Current assets include: accounts receivable, inventory, cash, short-term investments.
Current liabilities include: accounts payable, short-term loans, deferred revenue.
Positive WC = company has sufficient short-term assets to cover obligations. Negative WC = potential liquidity issue — or a sign of strong negotiating power (see below).
Days Sales Outstanding (DSO): Average number of days to collect receivables. Low DSO = customers pay quickly.
Days Payable Outstanding (DPO): Average number of days the company takes to pay suppliers. High DPO = company pays slowly = draws a "free credit" from suppliers.
Why track it
Changes in working capital affect OCF — if a growing company accumulates receivables or inventory, OCF can be lower than net income even without any operational problems.
Negative WC as a sign of strength: Amazon and Walmart have negative WC — customers pay immediately (cash), but suppliers wait 30–90 days. The company "holds" supplier money as a zero-interest operating loan. This is a sign of negotiating power, not a problem.
Real-world example
Watch out for
A rapid increase in receivables (rising DSO) can signal collection problems or aggressive revenue recognition. Always monitor whether DSO is trending up or down over time.