A:

Working capital can be negative if a company's current assets are less than its current liabilities. Working capital is calculated as the difference between a company's current assets and current liabilities. If a company's current assets substantially decrease as a result of a large one-time cash payment, or current liabilities increase due to significant credit extension resulting in an increase in accounts payable, its working capital may turn negative.

Working Capital

Working capital represents what a company currently has to finance its immediate operational needs, such as obligations to its vendors for extending credit on purchases of various goods and services to be used in the production process, inventory, cash balance and accounts receivable. Prepaid expenses are also part of working capital. When conducting valuations, certain investment professionals consider adjusted non-cash working capital that does not include cash and cash equivalents, short-term investments, and any loans and debt payments coming due within a year.

Negative Working Capital

Negative working capital is closely tied to the concept of current ratio, which is calculated as a company's current assets divided by its current liabilities. If a current ratio is less than 1, the current liabilities exceed the current assets and the working capital is negative.

If working capital is temporarily negative, it typically indicates that the company may have incurred a large cash outlay or a substantial increase in its accounts payable as a result of a large purchase of products and services from its vendors. However, if the working capital is negative for an extended period of time, it may be a cause of concern for certain types of companies, indicating that they struggle to make ends meet and have to rely on borrowing or stock issuances to finance their working capital.

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