A. Working capital is a measure of a company’s short-term liquidity and is calculated as the difference between a company’s current assets and its current liabilities. Negative working capital occurs when a company’s current liabilities exceed its current assets. This means that a company’s short-term obligations are greater than its short-term resources.
When a company has negative working capital, it can be an indication that the company is having difficulty meeting its short-term financial obligations. This can be a warning sign that the company may have trouble paying its bills on time or may be at risk of defaulting on its loans. Negative working capital can also be an indication that the company is not effectively managing its inventory or accounts receivable.
Negative working capital is not always a negative thing, as it could be a sign of a healthy business that is generating cash faster than it’s using it. For example, a company with a high level of accounts receivable and a low level of accounts payable may have negative working capital, but this could be an indication that the company is generating cash quickly and efficiently.
Amazon is famous for taking a benefit out of negative working capital. It collects from customers while taking orders or on delivery. It pays suppliers after a credit period as per its policy. This leaves it with extra cash perpetually – because the operating cycle itself is negative! So Amazon gets access to capital for free, which it invests in business growth
However, Negative working capital can also be a sign of a company that is struggling to meet its short-term obligations, which could lead to financial difficulties in the future. During due diligence, it is important to review the company’s working capital position and understand its implications on the company’s short-term liquidity and financial performance.
