Types of Ratios (Net Working Capital) Homework Help

Net Working Capital

Net working capital (NWC) represents the excess of current assets over current liabilities. The term assets refers to assets which in the normal course of business get convened into cash without dimension in value over a short period, usually not excluding one length of operating cash cycle whichever is more. Current Liabilities are those liabilities which at the inception are required to be paid in short period nomlally a year. Although is really not ratio, it is frequently employed as a measure of a company’s liquidity position. An enterprise should have sufficient in order to the claims of the creditors of business. The greater is the amount of NWC, the greater is the liquidity of the firm. Accordingly WC is a measure of liquidity, Inadequate working capital is the first sign of financial problems for a firm.

There is, however, no predetermined criterion as to what constitute adequate NWC. Moreover, the size of the NWC is not an appropriate measure of the liquidity position of n firm as shown in Table.


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