Investopedia Video: Working Capital

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Working capital is one of the basic metrics used to evaluate a company's financial health. Find out what it can tell you about a stock and learn how to calculate it.

For more content on Working Capital, check out;

Working Capital Works
http://www.investopedia.com/articles/fundamental/03/061803.asp

The Working Capital Position
http://www.investopedia.com/articles/basics/06/workingcapital.asp

Evaluating A Company's Capital Structure
http://www.investopedia.com/articles/basics/06/capitalstructure.asp

Working capital is a measure
of a company's financial strength.

Pete is thinking about investing
in the automotive industry,

and he has his eye
on two companies.

Arthur's Engines
and Joe's Motors.

Pete calculates the working
capital for each company.

Arthur's Engines has
$200,000 in current liabilities.

Liabilities that the company
must pay this year.

And $320,000
in current assets.

Assets that can be converted
into cash in less than a year.

Pete subtracts current liabilities
from current assets for both companies,

and discovers that Arthur's
has $120,000 in working capital.

This means the company can easily
pay down its short-term liabilities,

or debts,
using its current assets.

This is a sign of a profitable
and efficient business.

Joe's Motors,
on the other hand,

has $400,000
in current liabilities,

and only $360,000
in current assets,

meaning the company has a
working capital of negative $40,000.

Negative working capital
suggests that

Joe's may have trouble
paying its short-term debts.

Joe's might be
forced to sell an asset,

or raise more capital through
long-term debt, like a bond,

or, in the worst case,
the company could go bankrupt,

because it can't pay
what it owes.

Because of Joe's Motors
negative working capital,

Pete chooses Arthur's
Engines as an investment.

Working capital
helps investors judge

a company's financial
health and future prospects.

But no single measure
tells the whole story.

Working capital is one of many metrics
investors use to evaluate a stock.