What Is Gross Working Capital?

Gross working capital is the sum of a company's current assets (assets that are convertible to cash within a year or less). Gross working capital less current liabilities is equal to net working capital, or simply "working capital;" a more useful measure for bal🥀ance sheet an𝓡alysis.

Understanding Gross Working Capital

Gross working capital, in practice, is not useful. It is just one-half of a picture of a company's short-term financial health and the ability to use short-term resources efficiently. The other half is 澳洲幸运5官方开奖结果体彩网:current liabilities. Gross working capital, or 澳洲幸运5官方开奖结果体彩网:current assets, less current liab𝓀ilities, equates to working capital.

When working capital is positive, it means that current assets ar♕e greater than current liabilities. The preferred way to express positive working capital is the ratio of current assets to current liabilities (e.g., > 1.0).

If this ratio is less than 1.0, then a company may have trouble paying back its creditors in the short term. 澳洲幸运5官方开奖结果体彩网:Negative working capital is when liabilities outstrip assets and indicate that a company may be in distress. A company needs just the right amount of working capital to function optimally.

With too much working capital, some current assets would be better put to use elsewhere. With too little working capital, a company may not be able to meet its day-to-day cash requirements. Managers aim for the correct balance through 澳洲幸运5官方开奖结果体彩网:working capital management.

Some methods by which a company can improve its 𓄧working capital ratio include a reduction in time to collect receivables from customers, extending payable time frames with s🌼uppliers, a reduction in reliance on short-term debt, and appropriately managing inventory levels.

What's Included in Gross Working Capital?

Gross working capital includes assets such as cash, accounts receivable, inventory, short-term investments, and 澳洲幸运5官方开奖结果体彩网:marketable securities. Unlike net working capital, gross working capital🥂 omits liabilities and only focuses on what the company𓂃 owns. Gross working capital is the sum of current assets including:

• Cash and cash equivalents
• Marketable securities
• Accounts receivables to be collected within the next year
• Interest receivable to be collected within the next year.
• Inventory expected to be sold within the next year
• Other assets owned by the company expected to yield economic benefit within the next year.

Example of Gross Working Capital

An examination of gross working capital versus current liabilities provides many insights into a company's operations.

The changes in the components of current assets and liabilities from period to period can lead to further financial analy🦂sis to assess the short-run financial condition of a company. Sometimes it may be a surprise to an investor that a working capital ratio fell below 1.0. Breaking down the components and following the money would e𝄹xplain why.

For example, Company ABC reported gross working capital of $7 billion at the end of the fourth quarter of 2023, versus $7.23 billion in current liabilities, for a w💛orking capital raღtio of 0.97. The bulk of current liabilities is coming from the short-term debt of $3 billion.

At the end of the third quarter of 2024, ABC had pa𝓰id off its entire $3 billion in debt without taking on more debt. Gross working capital stood at $7.8 billion and current liabilities stood at $5 billion, resulting🧔 in a working capital ratio of 1.56. Between the end of 2023 and September 2024, the company repaid its short-term debt, thereby reducing current liabilities and sending the working capital ratio comfortably above 1.0.

Gross Working Capital of Microsoft

On its June 30, 2024 balance sheet, Microsoft reported $159.73 billion of total current assets. This was comprised of cash, cash equivalents, short-term investments, accounts receivable, inventories, and other current assets. The company reported total assets of $512.16 billion, though all long-term assets are excluded from gross working capital.

Microsoft also reported $125.29 billion of total current liabilities. While this amount would be subtracted from current assets to arrive at net working capital, it is excluded from consideration for gross working capital. Therefore, as of June 30, 2024, Microsoft carried $159.73 billion of gross working capital.

The Bottom Line

Gross working capital is the total value of a company's current assets. It provides insight into the short-term liquidity of a company but is particularly useful when assessed with current liabilities to determine net working capital.

Net working capital is a better metric for evaluating a company's ability to meet its short-term obligations, showing its capital management abilities and financial stability.