What Is Gross Working Capital?

What Is Gross Working Capital?

Let me explain gross working capital directly: it's the sum of a company's current assets, those things you can convert to cash within a year or less. When you subtract current liabilities from gross working capital, you get net working capital, which is what people usually mean by 'working capital'—that's the more practical metric for analyzing a balance sheet.

Key Takeaways

Gross working capital equals the total value of your company's current assets. It covers items like accounts receivable, inventory, and marketable securities. By itself, it's not that helpful because it doesn't show the full liquidity picture. Factor in current liabilities to calculate actual working capital, which reveals how well a company can handle short-term obligations. Remember, like other financial metrics, gross working capital gains real value when you track its changes over time or compare it to competitors.

Understanding Gross Working Capital

In practice, gross working capital isn't useful on its own—it's only half the story of a company's short-term financial health and how efficiently it uses resources. The other half is current liabilities. Subtract those from gross working capital, and you have working capital.

If working capital is positive, current assets exceed liabilities, and we prefer to express this as a ratio of current assets to liabilities, say greater than 1.0. A ratio below 1.0 means the company might struggle to pay creditors short-term. Negative working capital, where liabilities exceed assets, signals potential distress. You need the right amount of working capital to operate smoothly.

Too much means some assets could be better used elsewhere; too little, and daily cash needs might not be met. Managers balance this through working capital management. Ways to improve the ratio include speeding up receivable collections, extending supplier payment terms, cutting short-term debt, and managing inventory properly.

Important Note on Liquidity

Gross working capital helps gauge a company's liquidity by assessing its short-term debt-paying ability, but it's less about long-term solvency or overall financial health.

What's Included in Gross Working Capital?

Gross working capital includes assets like cash, accounts receivable, inventory, short-term investments, and marketable securities. Unlike net working capital, it ignores liabilities and focuses solely on what the company owns.

Note on Usage

Like other financial measurements, gross working capital is most useful when tracked over time or compared against competing companies.

Example of Gross Working Capital

Comparing gross working capital to current liabilities gives insights into operations. Changes in these components over periods can lead to deeper analysis of short-term financial condition. Sometimes, a working capital ratio dipping below 1.0 surprises investors, but breaking it down explains why.

Take Company ABC: At the end of Q4 2023, it had $7 billion in gross working capital versus $7.23 billion in current liabilities, for a ratio of 0.97. Most liabilities came from $3 billion in short-term debt. By Q3 2024 end, ABC paid off that $3 billion without new debt. Gross working capital rose to $7.8 billion, liabilities to $5 billion, yielding a ratio of 1.56. Repaying debt reduced liabilities and boosted the ratio above 1.0.

Gross Working Capital of Microsoft

On its June 30, 2024 balance sheet, Microsoft reported $159.73 billion in total current assets, including cash, cash equivalents, short-term investments, accounts receivable, inventories, and other current assets. Total assets were $512.16 billion, but long-term assets are excluded from gross working capital.

Microsoft had $125.29 billion in current liabilities, which we subtract for net working capital but ignore for gross. So, Microsoft's gross working capital was $159.73 billion as of that date.

What Is Gross Working Capital?

Gross working capital is a company's net working capital before deducting current liabilities—it's the gross value of current assets that can satisfy short-term obligations.

How Do You Calculate Gross Working Capital?

You calculate it just like total current assets: sum up cash, cash equivalents, receivables due within a year, inventory to be sold within a year, and other short-term assets.

What Is the Difference Between Gross Working Capital and Net Working Capital?

Gross working capital is working capital before subtracting short-term debt—it's just current assets. Net working capital accounts for both current assets and liabilities after subtraction.

The Bottom Line

Gross working capital is the total of a company's current assets, offering insight into short-term liquidity, but it's best used with current liabilities to find net working capital. That metric better evaluates a company's short-term obligation handling, capital management, and stability.