Tag Archives | current liabilities

Working Capital Analysis

See Also:
Balance Sheet
How to Collect Accounts Receivable
Factoring
Working Capital from Real Estate
Quick Ratio Analysis
Current Ratio Analysis
Financial Ratios

Working Capital Analysis Definition

Working capital (WC), also known as net working capital, indicates the total amount of liquid assets a company has available to run its business. In general, the more working capital, the less financial difficulties a company has.

Working Capital Analysis Formula

Use the following formula to calculate working capital:

WC = Current assetsCurrent liabilities

Working Capital Analysis Calculation

For example, a company has $10,000 in current assets and $8,000 in current liabilities. Look at the following formula to see the calculation.

Working capital = 10,000 – 8,000 = 2,000

Applications

Working capital measures a company’s operation efficiency and short-term financial health. For example, positive working capital shows that a company has enough funds to meet its short-term liabilities. In comparison, negative working capital shows that a company has trouble in meeting its short-term liabilities with its current assets.

Working capital provides very important information about the financial condition of a company for both investors and managements. For investors, it helps them gauge the ability for a company to get through difficult financial periods. Whereas, for management members, it helps them better foresee any financial difficulties that may arise. In conclusion, it is very important for a company to keep enough working capital to handle any unpredictable difficulties.

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Working Capital

See Also:
Balance Sheet
How to collect accounts receivable
Factoring
Quick Ratio Analysis
Current Ratio Analysis
Financial Ratios

What is Working Capital?

Use the following formula to figure out what is working capital.

Formula: Current Assets – Current Liabilities = Working Capital

Working Capital Definition

The Working Capital definition or WC is the difference between Current Assets versus Current Liabilities. Current Assets are those assets that will be turned into cash within one year, whereas Current Liabilities are those liabilities due within one year. This calculation represents the liquidity that a company has to meet its obligations coming due in the next 12 months. Though the amount should be positive, it can be a negative amount in times of distress.

Often used as a management tool, track the change in WC on a weekly basis. A company that is generating profits is usually increasing their WC. In comparison, declining profits often consume WC.

See Flash Report.

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Working Capital Definition
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Working Capital Definition

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Quick Ratio Analysis

Quick Ratio Analysis Definition

The quick ratio, defined also as the acid test ratio, reveals a company’s ability to meet short-term operating needs by using its liquid assets. It is similar to the current ratio, but is considered a more reliable indicator of a company’s short-term financial strength. The difference between these two is that the quick ratio subtracts inventory from current assets and compares the quick asset to the current liabilities. Similar to the current ratio, value for the quick ratio analysis varies widely by company and industry. In theory, the higher the ratio is, then the better the position of the company is; however, a better benchmark is to compare the ratio with the industry average.

Quick Ratio Explanation

Quick ratios are often explained as measures of a company’s ability to pay their current debt liabilities without relying on the sale of inventory. Compared with the current ratio, the quick ratio is more conservative because it does not include inventories which can sometimes be difficult to liquidate. For lenders, the quick ratio is very helpful because it reveals a company’s ability to pay off under the worst possible condition.

Although the quick ratio gives investors a better picture of a company’s ability to meet current obligations the current ratio, investors should be aware that the quick ratio does not apply to the handful of companies where inventory is almost immediately convertible into cash (such as retail stores and fast food restaurants).

Quick Ratio Formula

The current ratio formula is as follows:

Current ratio = (Current assets – Inventories) / Current liabilities

Or = Quick assets / Current liabilities

Or = (Cash + Accounts Receivable + Cash equivalents) / Current liabilities


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Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

See Also:
Balance Sheet
Working Capital
Current Ratio Analysis
Financial Ratios
Quck Ratio Analysis Benchmark Example

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Return on Capital Employed (ROCE)

See Also:
Return on Asset Analysis
Return on Equity Analysis
Financial Ratios
Return on Invested Capital (ROIC)
Current Ratio Analysis

Return on Capital Employed (ROCE) Definition

The return on capital employed ratio is used as a measurement between earnings, and the amount invested into a project or company.

Return on Capital Employed (ROCE) Meaning

The return on capital employed is very similar to the return on assets (ROA), but is slightly different in that it incorporates financing. Because of this the ROCE calculation is more meaningful than the ROA. The ROCE is generally used to find out how efficient and profitable a company is from year to year. As it is a percentage a company can locate problems or areas of improvement with the fluctuation of this ratio from year to year.

Return on Capital Employed (ROCE) Equation

The return on capital employed equation is as follows:

ROCE = EBIT or NI/(Total Assets – Current Liabilities)

Note: The earnings before interest and taxes, known as the operating income, is normally used, but people can also use the Net Income if they would like to incorporate the net interest and taxes into the ROCE formula.

Return on Capital Employed (ROCE) Example

Tim found that the ROCE last year is 16%. He would like to compare this number to the current ROCE. He begins by finding the following numbers in the Balance Sheet as well as the Income Statement:

Net Income = $50,000
Total Assets = $360,000
Current Liabilities = $35,000

ROCE = $50,000/($360,000 – $35,000) = 15%

Note: The drop in this number means that Tim’s company is not as efficient as it used to be or that it decreased it current liabilities.

return on capital employed

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Operating Capital Definition

Operating Capital Definition

The operating capital definition is the cash used for daily operations in a company. As a result, it is essential to the survival of each and every business. Whether small or large, across industries, and under any other conditions that a business faces, lack of cash is one of the main reasons why a company fails. Due to this fact, it is of key importance that businesses monitor and plan for future cash holdings to assure that the business will have the money needed to continue doing commerce.


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Operating Capital Explanation

Operating capital, explained as the most essential asset in any business, allows a company to stay open. Also known as working capital, it can come from many sources. Operating capital vs working capital is a similar comparison to red vs maroon apples: there is no difference.

The initial operating capital for small business will come from investors. This could come in the form of savings of the owners, friends and family of the owners, banks and the S.B.A., angel investors, or venture capital.

For an existing business, operating capital outlay will come from more providers than for the startup. The same options exist with current owners, friends and family, banks and the S.B.A., and more. Additionally, however, a business can receive operating capital loans from mezzanine financiers, factoring, or becoming a public company and selling stock on the open market.

Operating Capital Formula

Though the operating capital formula is a simple function of subtraction it is actually quite complicated. The difficult part of operating capital requirements is the research associated with finding current asset and current liability amounts. Once these questions are answered the operating capital ratio comes naturally.

Operating Capital = Current Assets – Current Liabilities

Operating Capital Calculation

The operating capital calculation is quite simple.

If:

Current Assets = $1,000,000

Current Liabilities = $250,000

Operating Capital = $1,000,000 – $250,000 = $750,000

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Operating Capital Example

For example, Chris is the CFO of a large company – a series of retail stores which sell plants for home decor. Chris plans the company finances to assure smooth operations. This includes managing company operating capital.

Recently, the company has experienced enormous growth. While this is a great signal that the business model is sound, it can also form a operating capital crisis. Consequently, Chris must move forward carefully to avoid financial ruin for the company.

First, Chris wants to know where the company stands. He then performs this working capital calculation to see where the business is currently:

Current Assets = $1,000,000

Current Liabilities = $250,000

Operating Capital = $1,000,000 – $250,000 = $750,000

Chris knows that $750,000 is not enough money to get the company through this quarter. He also knows that with insufficient working capital the company will have to seek financing from a lender who is less risk averse. So Chris does his research.

The two choices Chris learns are possible are factoring and mezzanine lending. Therefore, Chris will need to do a lot of research to evaluate both options. As he does this research, he is empowered by the importance of his work: the fate of the company rests upon it.

Conclusion

In conclusion, Chris chooses mezzanine lending as the option for the company. With mezzanine lending, he can have a total cost of capital lower than that with factoring. Additionally, mezzanine lenders will offer more money that that in the value of the receivables of the company.

Chris moves forward carefully in order to avoid a mistake. Because his nature as a planner makes this path an easy one, Chris will wait until he is prepared and then make the proper decision.

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Operating capital

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Interest Expense

See Also:
Interest Expense Formula
What is Compound Interest
Effective Rate of Interest Calculation
Nominal Interest Rate
When is Interest Rate Not as Important in Selecting a Loan?
Capitalized Interest

Interest Expense Definition

Interest expense, defined as a non-operating expense on the income statement, occurs anywhere money is borrowed. Consider this part of a company’s financing activities. Interest expense represents the company’s cost of borrowing money. It is calculated as the interest rate multiplied by the principal amount of the loan or debt. This type of expense can be interest payments on loans, bonds, or other debt instruments.

Interest Expense Explanation

Interest expenses may be recorded on the balance sheet as current liabilities before they are expensed. Record it in a liabilities account, if it was accrued prior to being paid. This liabilities account is also interest payable. This represents borrowing costs that the company has incurred but not yet paid.

Also, this expense can be recorded on the balance sheet as current assets if they are prepaid. This means that you have paid for them before they are due. Until they are due, you cannot recognize them as expenses according to the loan agreement. Record these payments as an asset on the balance sheet before they are expensed. Use the term prepaid interest interchangeably here.

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Interest expense

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Current Liabilities

See Also:
Balance Sheet
Current Assets
Fixed Assets
Fixed Assets – NonCurrent Assets

Current Liabilities

Current liabilities is a category of liabilities on the balance sheet. The category also consists of debts and other financial obligations expected to be paid or settled within one year or within one normal operating cycle of the business (whichever is longer). The balance sheet also includes a category for long-term liabilities. In this article, we will look at examples of items that would be found in this category and the key ratios to calculate current liabilities.

Examples of Items

Examples of items considered this type of liability include the following:

Key Ratios to Calculate Current Liabilities

You need to have the following key ratios to calculate current liabilities:

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current liabilities, Key Ratios to Calculate Current Liabilities

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