If the Company Owes, Good or Not?
If the compacy owes, Is that sign that there is a problem in the company? This question heard simple and should be answered easily. But, the reality turned out to be difficult. Because, the answer can be good or not for the company.
A lot of people thinking, if there someone starting to borrow money is an indication that you’re facing financial problems. Because affraid that the money can’t be returned, departing from this understanding and event, many investors also think, when the company start to borrow the money, means there are indications of financial problem.
So what we can do to analyse that problem?. Working capital ratio is one of the analysis which can be used to answer that phenomenon. Working capital, also known as net working capital, is the difference between a company’s current assets, like cash, account receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, like accounts payable.
Working Capital ratio 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 Ratio = 10.000/8.000 = 1,25
Working capital is a measure of both a company’s operational efficiency and its short-term financial health. The working capital ratio (current assets/current liabilities), or current ratio, indicates whether a company has enough short-term assets to cover its short-term debt. A good working capital ratio is considered anything between 1.2 and 2.0. A ratio of less than 1.0 indicates negative working capital, with potential liquidity problems, while a ratio above 2.0 might indicate that a company is not using its excess assets effectively to generate maximum possible revenue.
If a company’s current assets do not exceed its current liabilities, then it may have trouble paying back creditors or go bankrupt. A declining working capital ratio is a red flag for financial analysts.They might also look at the quick ratio, which is more of an acid test of short-term liquidity because it only includes cash and cash-equivalents, marketable investments and accounts receivable.
Changes in Working Capital Affect a Company’s Cash Flow
Most projects require an investment in working capital, which reduces cash flow, but cash will also fall if money is collected too slowly, or if sales volumes are decreasing – which will lead to a fall in accounts receivable. Companies that are using working capital inefficiently can boost cash flow by squeezing suppliers and customers.
Conclusion
A company has negative working capital If the ratio of current assets to liabilities is less than one. A high working capital ratio isn’t always a good thing. It might indicate that the business has too much inventory or is not investing its excess cash.
References:
https://www.accountingtools.com/articles/working-capital-analysis.html
https://www.investopedia.com/terms/w/workingcapital.asp
https://strategiccfo.com/working-capital-analysis-2/
https://m.kontan.co.id/news_kolom/907/Perusahaan-Berutang/Bagus-atau-Tidak/18%20November%202017
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even though it is impossible to expand without debt. but good Company must has the good fundamental to grow.
So I think the choice how to build the company step by step and enter the next level smoohtly without debt but with pure assets. what do you think about my opinion Ryan?
Agree with you. And also, at least the company have more cash & cash equivalent as current asset to pay short-term debt. Nuhun.
nice share ryan, as long as the debt is productive and the company is able to pay
So liability is not always bad for the company. Sometimes it’s required to maximize the possible revenue. Great article.
Yap it’s possible to do that. But if the company want to expand faster, there is no harm to owe, as long as the working capital ratio more than 1,2. thx pak Yuna;)
yoiiii. thx alfii to keep inspiring us
Thankyou Bunda, but the very important thing is if we want to owe, say first to our couple. hehe nyamnyam
yeahhh thats rightt graciee. thxxx for have read this article;))
Nice post Ryan, so company owes doesn’t always mean negative as long as company possible to pay the debt