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Gross Working Capital

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.

FAQs

  1. What is the formula for gross working capital (GWC)?

    Gross working capital is the total current assets of a business. The formula is: GWC = Current Assets

  2. What is net working capital (NWC)?

    Net working capital is the difference between current assets and current liabilities. The formula is: NWC = Current Assets – Current Liabilities

  3. What is a good NWC ratio?

    A good NWC ratio (current ratio) is typically between 1.2 and 2, meaning a company has enough assets to cover its liabilities without too much excess.

  4. How do you calculate net working capital (NWC)?

    To calculate NWC, subtract current liabilities from current assets: NWC = Current Assets – Current Liabilities

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