Question

LIQUIDITY RATIOS:

1. Net working capital for Walgreens 2018 = Current Assets – Current Liabilities = 17,846 – 21,667 = $ -3,821

Net working capital for Walgreens 2017 = 19,753 – 18,547 = $1,206

2. Net working capital for CVS 2018 = Current Assets – Current Liabilities = 45,243 – 44,009 = $1,234

Net working capital for CVS 2017 = 31,229 – 30,648 = $581

Analysis: What do the results of this calculation mean in the context of Walgreens? In the context of CVS? Compare the two - why are they different? Which is better or worse?

Must be at least four sentences for the above analysis.

Answer 1

In a broader sense working capital means

Current Assets – Current Liabilities.

Currents Assets are those assets which we can liquidize in one year or less.

Current liabilities are those assets which we can pay off in one year or less.

Here as per the example, Walgreens for 2018 is negative working capital.

Negative working capital is closely tied to the current ratio, which is calculated as a company's current assets divided by its current liabilities. If a current ratio is less than 1, the current liabilities exceed the current assets and the working capital is negative.

If working capital is temporarily negative, it typically indicates that the company may have incurred a large cash outlay or a substantial increase in its accounts payable as a result of a large purchase of products and services from its vendors.

However, if the working capital is negative for an extended period of time, it may be a cause of concern for certain types of companies, indicating that they are struggling to make ends meet and have to rely on borrowing or stock issuances to finance their working capital.

Positive working capital for CVS

When a company has more current assets than current liabilities, it has positive working capital. Having enough working capital ensures that a company can fully cover its short-term liabilities as they come due in the next twelve months. This is a sign of a company's financial strength.

However, having too much working capital in unsold and unused inventories, or uncollected accounts receivables from past sales, is an ineffective way of using a company's vital resources.

If we compare both companies

The amount of a company's working capital changes over time as a result of different operational situations. Thus, working capital can serve as an indicator of how a company is operating. When there is too much working capital, more funds are tied up in daily operations, signalling the company is being too conservative with its finances. Conversely, when there is too little working capital, less money is devoted to daily operations—a warning sign that the company is being too aggressive with its finances.