Term · Cash Flow & Working Capital
Working Capital
In briefWorking capital is at its core the balance of current assets and current liabilities; operationally, a narrower, non-uniform definition is usually used. For growing small caps it is often the reason for unexpected capital needs when inventories and receivables grow faster than revenue.
Definition
Working capital fundamentally refers to the difference between current assets and current liabilities. For operational analysis, a narrower, not uniformly defined delimitation is often used.
How it is calculated
Formula. Balance-sheet definition: current assets - current liabilities. Operational variants often exclude cash, financial debt and non-operating items.
Why it matters for small caps
For growing small caps it is often the reason for unexpected capital needs, when inventories/receivables grow faster than revenue.
Common misreadings
- Positive working capital is automatically judged as good. What is decisive are the business model, the composition, the quality of receivables and the financing of current assets.
In the process
Frequently asked
What is working capital?
It describes the funds tied up in operations as the difference between current assets and current liabilities. In practice there are narrower, operational definitions.
How do you delimit operating working capital?
On the balance sheet you subtract current liabilities from current assets; operational variants exclude cash, financial debt and non-operating items. The chosen delimitation should be disclosed.
Why is high working capital not automatically good?
It depends on the business model, structure, recoverability of receivables and the financing of current assets. A high figure can also mean tied-up, hard-to-liquidate funds.
Related terms
Sources
Primary
IFRS Foundation – IAS 1 Presentation of Financial Statements
https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/
https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/
Methodology
IFRS Foundation – IAS 7 Statement of Cash Flows
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.