Net Working Capital

TABLE

Net Working Capital

Net Working Capital

If the size of NWC is a measure of liquidity, Company A must be three times as liquid as Company B. However, a deeper probe would show that his is not so. A comparison of current liabilities and current assets of both the firms shows that for each rupee of current liability, B has Rs 3 of current  assets, while A has only Rs 1.50. Thus, while A has-three times the NWC of B, the current assets of the former are only 1.5 times its current liabilities as compared to 3 times in case of the latter. Obviously, from the viewpoint of he ability to meet its current obligations, firm B is in a better position than firm A. Another limitation of NWC, as a measure of liquidity, is that   change in NWC does not necessarily reflect a change in the liquidity position of a firm.

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