Title: Does working capital measure liquidity?
Headings: Does Working Capital Measure Liquidity?
Does Working Capital Measure Liquidity?
Key Takeaways
Working Capital as a Measure for Liquidity
Drivers of Working Capital Liquidity
Current Assets
Current Liabilities
Interpreting Working Capital Liquidity
Positive Working Capital – Liquidity
Banks
Suppliers
Excessive Liquidity
Negative Working Capital – Inadequate Liquidity
Cash Outlays
Seasonal Businesses
Long-term Issues

Content: Drivers of Working Capital Liquidity
The two components of working capital are called current assets and current liabilities, which are described in detail below. Current Assets
Current assets are the assets that a company owns that are expected to be used up within the next 12 months. Examples of current assets include: Cash and cash equivalents
Accounts receivable, which are the payments owed by customers for products and services sold
Inventory, which can consist of merchandise and finished goods that can be liquidated or sold to raise cash
Marketable securities, which are investments that are not locked up and can be easily redeemed for cash
Prepaid expenses include any payments to contractors or vendors for services not yet received
Current Liabilities
Current liabilities are the short-term debts or bills that a company owes within the next 12 months and are typically paid for by using current assets. Examples of current liabilities include: Accounts payable, which are debts owed to suppliers and vendors
Wages payable that are due to employees within the next year
Short-term debt, which includes bank loans used to fund the company's operating expenses
Dividends payable, which are cash payments due to equity shareholders as a reward for being an investor in the company
Current portion of long-term debt that's due in the next 12 months
Interest payable on outstanding debts, including long-term obligations
Income taxes due within the next year
Interpreting Working Capital Liquidity
Working capital is the measure of how well a company can sell its current assets to pay its current liabilities. For example, if a company has an accounts payable coming due in 30 days, the company could sell some of its merchandise inventory or withdraw cash from its marketable securities to satisfy the payable that's coming due. However, if that same company didn't have enough merchandise inventory, or any cash on hand, or marketable securities, it could run into difficulty paying its accounts payable. As a result, investors and equity analysts, as well as banks that extend credit to companies, analyze whether a company has the current assets to cover its current liabilities. Working capital reflects various company activities, such as debt management, revenue collection, payments to suppliers, and inventory management.