Weighted Working Capital Definition

Forex Glossary

Definition

The word weighted working-capital refers to some calculation which makes it possible for an investor-analyst to grasp the shift in working capital in accordance with earnings from year to year. Ordinarily, a negative value would suggest that a more efficient utilization of working capital, while a positive value suggests a reduction in efficacy.

Calculation

Weighted Working Capital = Current Year’s Working Capital – Prior Year’s Working Capital x (1 percent Change in Revenues)

Where:

  • Working capital is equal to current assets (accounts receivable and inventory) minus accounts receivable.
  • Change in earnings represents the growth or reduction in earnings from both phases where working funding is being analyzed.

Explanation

Liquidity measures allow the investor-analyst to comprehend the provider ‘s long term viability concerning financial wellbeing. That is generally evaluated by examining balance sheet items such as accounts receivable, usage of inventory, accounts receivable, and also shortterm obligations. One of those techniques to comprehend the total liquidity position of a provider is by simply calculating their weighted working-capital.

As may be true with additional bandwidth calculators, weighted working-capital eliminates balances receivable in existing resources, which delivers a better index of bandwidth compared to metrics such as earnings to assets that are current. The weighted working-capital metric allows the investor-analyst to grasp the shift in working capital in accordance with this change in earnings revenues as time passes. If a provider is growing better in using working capital, this metric can results at a negative price. If a provider is using working capital in an interest speed which is higher compared to the pace of which earnings are rising, the value will probably stay favorable.

Example

The director of a big mutual fund will love to appraise the liquidity position of Company ABC. He considers the weighted working-capital would provide let him comprehend whether the provider is growing more efficient in their utilization of working capital as time passes. The finance manager asked his analytic team to successfully calculate Company ABC’s optional working-capital. The analytic team pulled the past two yearly reports for Company ABC, and also the dining table below comprises Company ABC’s info within the past two decades:

Prior Year Current Year
Sales $107,740,800 $123,840,000
Working Capital $17,685,200 $15,876,923

The shift in earnings revenues will be computed :
= ($123,840,000 – $107,740,800) / $107,740,800, or 14.9percent

Calculating the weighted working funds then becomes
= 15,876,923 – $17,685,200 x (1 14.9percent )
= 15,876,923 – $17,685,200 x 1.149
= 15,876,923 – $20,327,816, or ($4,450,893)

The bad value to your metric indicates working-capital keeps growing at a lesser pace than earnings, this means Company ABC is having working capital better.