Working Capital

Working Capital

Working capital

Total current assets less total current liabilities gives the net current assets. This is also termed the working capital. As this represents the company's resources immediately available for conducting the business, a comfortable margin of net current assets indicates a healthy financial position. A deficit on the other hand (net current liabilities, i.e., excess of current liabilities over current assets) may be caused by heavy recent capital expenditure, which means (a) increasing fixed assets at the expense of decreasing current assets, or (b) increasing bank overdraft. Should the deficit continue or increase, this may be an indication of a forthcoming 'rights' issue to remedy the deficit.

Ascertain the 'asset value' and compare this with the market value. The 'asset value' per share (also called 'equity asset', 'break-up value' or 'net asset backing' of share) is the balance-sheet value of the assets per share which would remain available for the ordinary shareholders on a winding-up of the company, after all prior claims had been met.

The 'asset value is arrived at by adding all the tangible assets (fixed and current), then deducting from this total as follows: Preference shares, loan capital, deferred liabilities and current liabilities. The residue is then divided by the number of ordinary shares issued. The result obtained is the 'asset value per share. The financial Press works out for you the 'asset value' per share in discussing the merits or demerits of shares of selected companies. Example: Company X has:

Preference shares

Loan capital Fixed assets....14

Deferred liabilities..3

Current liabilities Current assets..18

Prior claims. Total assets..32

Ordinary shares....10

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