Ratios: Net Working Capital

This indicator is another liquidity measure that expands to include all current (within 12 months) assets such as receivables and inventory. It tells you what’s available for operations day-to-day after current bills are paid. The basic formula for this indicator is:

Current Assets - Current Liabilities

Signal:  Positive is better than negative; upward trend is good; downward trend may be cause for concern.

Calculation:  Receivables due over twelve months in the future are considered long-term and should be excluded from the current assets amount. Similarly, portions of liabilities that are not due within twelve months should be excluded from the current liabilities amount.

Caveat:   Some formulas call for excluding cash from both current assets and current liabilities.