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.