Lisa Borga

Gross working capital refers to the total sum of all current assets within a company.

Current assets include all of the assets a company holds, which can be converted into cash within a single year.

Common examples of this are cash, accounts receivable, raw material, work in progress, finished goods inventories, short-term investments, and marketable securities.

Because gross working capital provides an indication of a company’s available cash flow, it can provide management with valuable information for making financial decisions.

This metric can also be used to calculate net working capital, which is a key tool for analyzing liquidity by subtracting all current liabilities from gross working capital.

## Gross Working Capital Explained

Gross working capital refers to the total number of current assets a company possesses at any given time in an accounting year.

These current assets are any assets that can be converted into cash within the same year or accounting period, such as cash accounts, accounts receivable, inventory, and short-term investments.

In practice, gross working capital is the amount of funds that are available to a company in order to meet its obligations.

Gross working capital is a valuable metric when used in conjunction with other financial data such as current liabilities.

On its own gross working capital provides the sum of a company’s total current assets, and though this can provide a valuable picture of the company’s cash flow, it cannot provide a full view of the company’s liquidity.

To find this, a company will need to compare this metric to current liabilities.

One way of using gross working capital to analyze a company’s financial health is to calculate net working capital, which is current assets minus current liabilities.

Net Working Capital = Current Assets – Current Liabilities

If the resulting number is positive, then this indicates that the company’s current assets are greater than its current liabilities.

Another way of using gross working capital to analyze a company’s current financial health is to analyze its working capital ratio, which is its ratio of current assets to current liabilities. The formula for this is:

Working Capital Ratio = Current Assets / Current Liabilities

If the ratio is less than one, this may indicate the company will have difficulty repaying its creditors.

If the resulting number is negative, then this indicates that current liabilities are greater than current assets, and the company could have an uncertain financial future ahead of it.

However, it is important to keep in mind that an excess of working capital may not help a company either.

In many cases, these assets may be better invested in order to reap long-term benefits for the company.

Company leaders must work to balance maintaining a suitable amount of working capital to meet the organization’s operational requirements while avoiding maintaining excessive cash reserves that could be more efficiently allocated.

There are many methods that can be used to improve working capital management.

This includes reducing the time available to customers to make payments on credit sales, extending payment deadlines with suppliers, reducing short-term debt, and maintaining appropriate inventory levels.

## Gross Working Capital Example

Gross working capital, when used in conjunction with current liabilities, can reveal a lot about a company’s current financial health.

By tracking the changes in gross working capital and current liabilities and analyzing the changes, it is possible to learn a lot about a company’s operations.

The changes that occur in the items making up current assets, as well as liabilities from one period to the next, can be analyzed to help obtain a better picture of the short-term financial health of a company.

It’s possible that an investor may learn some unfavorable information, such as the working capital ratio falling below one.

Then, by conducting a more thorough analysis, an investor could find out why this happened.

As an example, suppose Company X has a gross working capital of \$5 billion as of the close of the fourth quarter of 2020, as compared to current liabilities of 5.25 billion.

This would result in a .95 working capital ratio.

The current liabilities are predominately made up of 2.50 billion in short-term debt.

When the third quarter of 2021 ended, Company X had finished paying off its 2.5 million in debt and did not acquire more debt.

The company had gross working capital of \$5.50 billion and \$3 billion in current liabilities, which meant the company had a working capital ratio of 1.83.

Because the company paid off its short-term debt between the end of the fourth quarter of 2020 and the end of the third quarter of 2021, it reduced its current liabilities.

This caused its working capital to rise to above 1.

## Final Thoughts

Gross working capital essentially refers to the sum of a company’s current assets, including its cash and cash equivalents, accounts receivable, and short-term investments, among other assets which can be converted into cash within a single year.

Though on its own, this metric is of limited value in decision making, when used in conjunction with current liabilities, it can provide a valuable tool for analyzing a company’s financial health and ability to meet its financial obligations.

## Key Takeaways

• Gross working capital is the total value of all current assets, including accounts receivable, inventories, and short-term investments, among others.
• Though gross working capital provides a valuable picture of a company’s current assets on its own, this metric is of limited value in financial decision-making because it does not account for current liabilities, which are necessary to analyze liquidity.
• Gross working capital is one of the key inputs in finding net working capital, which provides a full picture of an organization’s current liquidity and a better indication of its financial health.

FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.

1. Purdue University "Working Capital: What Is It And Do You Have Enough?" Page 1 . August 11, 2022

2. Michigan State University "Financial Ratios Part 3 of 21: Working Capital to Gross Revenues" Page 1 . August 11, 2022