Working capital is a crucial metric that helps investors and business owners understand a company’s short-term liquidity and operational efficiency. It shows whether a company has enough current assets to meet its short-term liabilities.
Let’s break it down with meaning, formula, and a simple example using Indian companies.
What is working capital?
Working capital is the difference between a company’s current assets and current liabilities.
It represents the funds available to run daily business operations like paying suppliers, managing inventory, and covering wages.
In simple terms:
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Positive working capital = Company can pay off its short-term liabilities comfortably
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Negative working capital = Company may face liquidity issues or working capital stress
Formula for working capital
Working Capital = Current Assets – Current Liabilities
Where:
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Current assets include: Cash, accounts receivable, inventory
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Current liabilities include: Short-term debt, accounts payable, other short-term obligations
Example of working capital with Indian companies
Let’s take Marico Limited (an FMCG company) as an example.
For FY24:
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Current Assets = Rs 3,500 crore
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Current Liabilities = Rs 2,000 crore
So,
Working Capital = 3,500 – 2,000 = Rs 1,500 crore
This positive working capital shows Marico has enough liquidity to manage its short-term needs.
Industry-wise working capital trends in India
| Industry | Typical Working Capital Trend |
|---|---|
| FMCG (HUL, Dabur) | Positive & stable working capital |
| IT (TCS, Infosys) | Asset-light, positive working capital |
| Retail (DMart) | Often negative (because of upfront customer payments) |
| Auto (Maruti Suzuki) | Positive but dependent on inventory cycles |
| Steel (Tata Steel) | Positive but vulnerable to raw material cost swings |
Why working capital matters for Indian investors
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Liquidity check: Shows if the company can survive short-term disruptions.
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Operational efficiency: Efficient working capital management means less money stuck in inventory or receivables.
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Investor confidence: Consistent positive working capital builds investor trust, especially in sectors like FMCG and manufacturing.
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Growth readiness: Companies with healthy working capital can fund their growth without resorting to expensive short-term borrowing.
Important ratios linked to working capital
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Current Ratio = Current Assets / Current Liabilities (Ideal: Above 1)
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Quick Ratio = (Current Assets – Inventory) / Current Liabilities
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Working Capital Turnover Ratio = Revenue / Working Capital
Final takeaway
Working capital is a real-time snapshot of a company’s financial health and operational efficiency.
For Indian investors, tracking working capital trends is especially important for sectors like FMCG, auto, retail, and manufacturing.
Before investing, check how a company manages its short-term assets and liabilities to avoid liquidity-driven surprises.
