Gross Working Capital

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 includes assets
such as cash, accounts receivable, inventory, short-term investments,
and marketable securities. Gross working capital less current liabilities is equal to
net working capital, or simply "working capital;" a more useful measure for
balance sheet analysis.

KEY TAKEAWAYS

 Gross working capital is the total value of a company's current assets.

 Accounts receivable, inventory, and marketable securities are all examples
of gross working capital.
 On its own, gross working capital is not useful, as it does not give a full
picture of a company's liquidity.
 Including current liabilities into the equation results in calculating working
capital, which is a true picture of a company's liquidity and its ability to
meet its short-term obligations.
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 current liabilities. Gross working capital, or current
assets, less current liabilities, equates to working capital. When working capital is
positive, it means that current assets are 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. 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 working capital management.

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

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 analysis to assess
the short-run financial condition of a company. Sometimes there 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 explain why.

For example, Company ABC reported gross working capital of $7 billion at the
end of the fourth quarter of 2019, versus $7.23 billion in current liabilities, for a
working capital ratio 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 2020, ABC had paid 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 2019 and September 2020, the company repaid its short-
term debt, thereby reducing current liabilities and sending the working capital
ratio comfortably above 1.0.