How Best to Evaluate the Investment Quality of a Company's Working Capital Position?
The strength of a company’s balance sheet can be evaluated by examining three broad categories of investment quality; Working Capital Adequacy, Asset Performance and Capital Structure. Let us consider Working Capital Adequacy, to evaluate the investment quality of a business organization.
WORKING CAPITAL;
Working capital may be regarded as lifeline of a business. It provides the ability to fund business operations, reinvest and meet capital requirements and payments. Understanding a business’s working capital health is essential to make investment decisions. A good way to judge a company’s working capital prospects is to look at its Working Capital Management.
The concept of ‘working Capital’ was first evolved by Karl Marx, though in a different form-‘Variable Capital’. According to Marx, Variable Capital means outlays for payrolls advanced to workers before the goods they worked-on were complete. He contrasted this with ‘Constant Capital’ or ‘Dead Labour’, meaning outlays for raw-materials and other instruments of production produced by labour in earlier stages, which are now needed for live labour to work with the present stage. [Luxemburg, Rosa; The Accumulation of Capital; Monthly Review Press, New York, 1968]. This Variable Capital is nothing but, wage fund which remains locked in work-in-process along with other operating expenses, until it is realized` through sale of finished goods. Although, Karl Marx didn’t mention that workers also gave credit to the firm by accepting periodical payment of wages which funded a portion of work-in-process, the concept of Working Capital, as we understood today, was embedded in his ‘Variable Capital’. Today, Working Capital is regarded as the fund needed to carry on operations during the Cash Conversion Cycle (CCC) or Operating Cycle. Working Capital refers to the cash or fund, a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw-materials into finished goods,
WORKING CAPITAL;
Working capital may be regarded as lifeline of a business. It provides the ability to fund business operations, reinvest and meet capital requirements and payments. Understanding a business’s working capital health is essential to make investment decisions. A good way to judge a company’s working capital prospects is to look at its Working Capital Management.
The concept of ‘working Capital’ was first evolved by Karl Marx, though in a different form-‘Variable Capital’. According to Marx, Variable Capital means outlays for payrolls advanced to workers before the goods they worked-on were complete. He contrasted this with ‘Constant Capital’ or ‘Dead Labour’, meaning outlays for raw-materials and other instruments of production produced by labour in earlier stages, which are now needed for live labour to work with the present stage. [Luxemburg, Rosa; The Accumulation of Capital; Monthly Review Press, New York, 1968]. This Variable Capital is nothing but, wage fund which remains locked in work-in-process along with other operating expenses, until it is realized` through sale of finished goods. Although, Karl Marx didn’t mention that workers also gave credit to the firm by accepting periodical payment of wages which funded a portion of work-in-process, the concept of Working Capital, as we understood today, was embedded in his ‘Variable Capital’. Today, Working Capital is regarded as the fund needed to carry on operations during the Cash Conversion Cycle (CCC) or Operating Cycle. Working Capital refers to the cash or fund, a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw-materials into finished goods,