What is pure working capital?

Pure working capital measures liquidity, company efficiency and overall financial health at the time it is calculated. To determine this amount, also known as the working capital relationship, its current obligations are deducted from current assets. A positive ratio suggests the ability to pay creditors and improve business, while a negative ratio suggests financial difficulties. Comparing the amounts of net working capital at different time periods is useful in determining areas in which the company is successful with cash management and areas where it needs improvement. Measurement of net working capital is a good way to measure the management of the company's cash and what is more important, its ability to function without lagging in its financial obligations. The workpometer of the Ing capital is determined by the acceptance of all different assets of the company - which may come in the form of cash, shares, receivables or supplies - and by deducting its obligations, which usually take the form of payable accounts.

For example, imagine a company that has USD assets worth $ 500 (USD) and $ 250 in obligations. In this situation, the $ 250 from $ 500 would leave a net working capital of $ 250. This basically means that if the company was forced to repay all its accounts immediately, it would still be $ 250 in the bank.

This ratio is similar to the current ratio, which is calculated by the division of the company's assets according to the obligations. For example, using the above numbers above, the current ratio of this company would be 2.00, which is the result of a $ 500 distribution of $ 250. In both cases, the positive ratio suggests that the company has the ability to repay its debts and improve, while the negative ratio is problematic and means that the company has to improve its financial health.

Pure working capital can also be a good indicator of the company's efficiency. A company that has solid dataThe sale and still suffer from low amounts of capital, it can be inefficient in collecting payments or earning inventory. Measurement of working capital ratios over several different periods of time can reveal trends that show whether the capital of society in the long run is strong and stable in the long term, or whether to correct any correction to reverse the decline.