Definition of Negative Working Capital
Negative working capital describes a situation where a company’s current liabilities exceed its current assets as shown in the company’s balance sheet. In other words, there are more short-term debts than short-term assets.
Positive Aspects of Negative Working Capital
Negative working capital often arises when a company generates cash very quickly because it can sell its products to customers before it has to pay its suppliers’ bills for raw materials or goods. In this way, the company effectively uses supplier funds to achieve growth.
Changes in Working Capital Strategies
A company’s negative working capital may change over time as business strategies and needs evolve. Financial data from McDonald’s shows that the world’s largest restaurant had negative working capital of $698.5 million between 1999 and 2000.
Example
Examples of negative working capital are common in the retail sector. For instance, suppose Walmart orders 500,000 copies of a movie to pay later to the movie studio within 30 days. By the sixth or seventh day, Walmart has already placed the DVDs on the shelves of its stores nationwide, and by the twentieth day, the company may have sold all the DVDs.
Industries Typically Having Companies with Negative Working Capital
A company with negative working capital on its balance sheet is more likely to occur when dealing with companies that only do cash sales and enjoy good sales with high inventory turnover. These companies are typically retail and consistently achieve high sales. Examples include: grocery stores, discount stores, restaurants, and online retailers.
Buying a Company Without Paying for It
If you can buy a company for the value of its working capital, you are essentially paying nothing for the operation. For example, suppose there is a company called XYZ. At one point in its history, the company had $933 million in working capital.
Frequently Asked Questions
What is net working capital?
When is negative working capital bad?
How do investors evaluate negative net working capital?
Sources:
McDonald’s. “McDonald’s Annual Report 2000”, page 37. Accessed on September 22, 2020.
McDonald’s. “McDonald’s Annual Report 2017”, page 33. Accessed on September 22, 2020.
AutoZone. “Annual Report 2017 – Form 10-K”, page 23. Accessed on September 22, 2020.
Source: https://www.thebalancemoney.com/negative-working-capital-on-the-balance-sheet-357287
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