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Tutorial - An Analysis of a Company's Liquidity Position Using Financial Ratios

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Calculate the company's net working capital
Tutorial - An Analysis of a Company's Liquidity Position Using Financial Ratios

Net Working Capital Calculation and Analysis

Rosemary C. Peavler

Tip: Click on the image to see it in full screen mode. You will also see it in a different window so you can read the explanation and see the image at the same time.

A company's net working capital is the difference between its current assets and current liabilities:

Net Working Capital = Current Assets - Current Liabilities

For 2008, this company's net working capital would be:

$708 - 540 = $168

From this calculation, you already know you have positive net working capital with which to pay short-term debt obligations before you even calculate the current ratio. You should be able to see the relationship between the company's net working capital and its current ratio.

For 2007, the company's net working capital was $99, so its net working capital position, and, thus, its liquidity position, has improved from 2007 to 2008.

Click to the next step to see the summary of this firm's simple liquidity analysis.

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