What is Trade Working Capital
BREAKING DOWN Trade Working Capital
Trade working capital differs from working capital. Working capital takes into account all current assets — including cash, marketable securities, accounts receivable, prepaid expenses and inventories — and all current liabilities — including accounts payable, taxes payable, interest payable and accrued expenses. Trade working capital considers only current assets and liabilities that are related to daily operations. Because it defines working capital more narrowly, it is a more stringent measure of a company's short-term liquidity. A company with more current liabilities than current assets has negative working capital, and this is considered a sign of financial weakness.
Trade Working Capital Calculation
If a company has $10,000 in accounts receivable associated with everyday operations, $2,000 in inventories and $5,000 in accounts payable associated with everyday operations, then it trade working capital is:
$10,000 + $2,000 - $5,000 = $7,000.