Net working capital to total assets ratio là gì

A net working capital ratio gives business owners a general idea of their business’s liquidity by showing how effective it is at paying off its current liabilities (outstanding short-term debt) with its current assets. The net working capital ratio’s numerator and denominator come from a business’s balance sheet, and you can find them in the formula below:

• Alternate name: Current ratio

Here’s an example: If a business has $1,000 in cash, $2,000 in accounts receivables, $2,000 in inventory, and $2,500 in current liabilities, what is its net working capital ratio?

Net Working Capital Ratio = Current Assets / Current Liabilities

\= Cash + Accounts Receivables + Inventory / Current Liabilities

\= $1,000 + $2,000 + $2,000/$2,500

\= 2.0

This means the business can cover its current liabilities twice over with its current asset base.

How the Net Working Capital Ratio Works

The net working capital ratio is sometimes defined incorrectly. You may see it defined as current assets minus current liabilities. That equation is actually used to determine working capital, not the net working capital ratio.

Note

Working capital refers to the difference between current assets and current liabilities, so this equation involves subtraction. The net working capital ratio, meanwhile, is a comparison of the two terms and involves dividing them.

Current assets refer to those assets that mature within one year. Current liabilities refer to those debts that the business must pay within one year. The desirable situation for the business is to be able to pay its current liabilities with its current assets without having to raise new financing.

Current assets typically include cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include accruals, accounts payable, and loans payable.

Extended Example of Net Working Capital Ratio

Here is an extension of the example used previously:

If this business also has $1,000 in marketable securities, and the current liabilities include $3,000 in loans payable, what is the net working capital ratio?

Net Working Capital Ratio = Current Assets / Current Liabilities

\= Cash + Accounts Receivable + Inventory + Marketable Securities / Current Liabilities + Loans Payable

\= $1,000 + $2,000 + $2,000 + $1,000/$2,500 + $3,000

\= $6,000/$5,500

\= 1.09 Times

This means the business can cover its current liabilities—but just barely—at 1.09 times.

As mentioned above, the net working capital ratio is a measure of a firm’s liquidity or how quickly it can convert its assets to cash. In the extended example provided, you can see that if the business has fewer credit customers (accounts receivable) than anticipated, or if it has less inventory, cash, or marketable securities than expected, the net working capital ratio can fall below 1.0. If that happens, then the business would have to raise financing to pay off even its short-term debt or current liabilities.

Note

In reality, you want to compare ratios across different time periods of data to see if the net working capital ratio is rising or falling. You can also compare ratios to those of other businesses in the same industry.

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets

What is Net Working Capital?

Simply put, Net Working Capital (NWC) is the difference between a company’s current assets and current liabilities on its balance sheet. It is a measure of a company’s liquidity and its ability to meet short-term obligations, as well as fund operations of the business. The ideal position is to have more current assets than current liabilities and thus have a positive net working capital balance.

NWC is most commonly calculated by excluding cash and debt (current portion only).

Image: CFI’s Financial Analysis Fundamentals Course.

Key Highlights

• Net working capital is an important concept not just for analyzing a company, but also how it impacts the calculation of a company’s cash flows.
• The most common calculation is non-cash current assets less non-debt current liabilities.
• Understanding the net working capital formula is crucial in determining if the company is generating cash from its working capital or using cash.

Net Working Capital Formula

There are a few different methods for calculating net working capital, depending on what an analyst wants to include or exclude from the value.

Formula:

Net Working Capital = Current Assets – Current Liabilities

or,

Formula:

Net Working Capital = Current Assets (less cash) – Current Liabilities (less debt)

or,

NWC = Accounts Receivable + Inventory – Accounts Payable

The first formula above is the broadest (as it includes all accounts), the second formula is more narrow, and the last formula is the most narrow (as it only includes three accounts). Learn more in CFI’s Financial Analyst Training Program.

Download the Free Template

Enter your name and email in the form below and download the free template now!

Setting up a Net Working Capital Schedule

Below are the steps an analyst would take to forecast NWC using a schedule in Excel.

Step 1

At the very top of the working capital schedule, reference sales and cost of goods sold from the income statement for all relevant periods. These will be used later to calculate drivers to forecast the working capital accounts.

Step 2

Under sales and cost of goods sold, lay out the relevant balance sheet accounts. Separate current assets and current liabilities into two sections. Remember to exclude cash under current assets and to exclude any current portions of debt from current liabilities. For clarity and consistency, lay out the accounts in the order they appear in the balance sheet.

Step 3

Create subtotals for total non-cash current assets and total non-debt current liabilities. Subtract the latter from the former to create a final total for net working capital. If the following will be valuable, create another line to calculate the increase or decrease of net working capital in the current period from the previous period.

Step 4

Populate the schedule with historical data, either by referencing the corresponding data in the balance sheet or by inputting hardcoded data into the net working capital schedule. If a balance sheet has been prepared with future forecasted periods already available, populate the schedule with forecast data as well by referencing the balance sheet.

Step 5

If future periods for the current accounts are not available, create a section to outline the drivers and assumptions for the main assets. Use the historical data to calculate drivers and assumptions for future periods. See the information below for common drivers used in calculating specific line items. Finally, use the prepared drivers and assumptions to calculate future values for the line items.

Video Explanation of Net Working Capital

Below is a short video explaining how the operating activities of a business impact the working capital accounts, which are then used to determine a company’s NWC.

Common Drivers Used for Net Working Capital Accounts

Below is a list of assumptions that are used in a financial model to forecast NWC:

• Accounts Receivables: Accounts Receivable Days
• Inventory: Inventory Days
• Other Current Assets: Percentage of sales, growth percentage, fixed amount, or increasing amount
• Accounts Payable: Accounts Payable Days
• Other current liabilities: Percentage of sales, growth percentage, fixed amount, increasing amount

Accounts receivable days, inventory days, and accounts payable days all rely on sales or cost of goods sold to calculate. If either sales or COGS is unavailable, the “days” metrics cannot be calculated. When this happens, it may be easier to calculate accounts receivables, inventory, and accounts payables by analyzing the past trend and estimating a future value.

Use of Net Working Capital in Financial Modeling

Changes in net working capital impact cash flow in financial modeling.

Look closely at the image of the model below, and you will see a line labeled “Less Changes in Working Capital” – this is where the impact of increases/decreases in accounts receivable, inventory, and accounts payable impact the unlevered free cash flow of a firm.

Understanding the impact of changes in net working capital is extremely important in financial modeling and corporate valuation. To learn more, check out CFI’s financial modeling courses now!

Additional Resources

This has been CFI’s guide to Net Working Capital. To advance your career as an analyst, read more about the other elements that populate financial statements: