Gross Working Capital
Gross Working Capital (GWC)
Gross working capital (GWC) is a measure of a company’s current assets that are used to finance its current liabilities. It is calculated by subtracting current liabilities from current assets.
Formula:
GWC = Current Assets – Current Liabilities
Components of GWC:
- Current Assets: Accounts receivable, inventory, cash, short-term investments, prepaid expenses.
- Current Liabilities: Accounts payable, short-term debt, current portion of long-term debt.
Interpretation:
GWC measures the company’s ability to meet its current obligations. A high GWC indicates that the company has ample current assets to cover its current liabilities. Conversely, a low GWC indicates that the company may have difficulty meeting its current obligations.
Uses:
- Liquidity Ratio: GWC is used to calculate the liquidity ratio, which measures the company’s ability to meet current obligations.
- Quick Ratio: GWC is also used to calculate the quick ratio, which excludes inventory from current assets.
- Current Ratio: GWC is used to calculate the current ratio, which measures the company’s current asset-to-current liability ratio.
Example:
Suppose Company ABC has current assets of $100,000 and current liabilities of $50,000. Its gross working capital is:
GWC = $100,000 – $50,000 = $50,000
This indicates that Company ABC has $50,000 of current assets available to cover its current liabilities.
Key Points:
- GWC measures current assets minus current liabilities.
- It is an important measure of liquidity.
- High GWC indicates ample current assets to cover current liabilities.
- Low GWC indicates difficulty meeting current obligations.
