Net working capital: how can a profitable company still run short of cash?
A common management question is: “If the company is profitable, why is there no cash in the bank?” Working capital is often part of the answer.
What is net working capital?
A simple balance-sheet definition is:
Net working capital = current assets − current liabilities
It indicates how far short-term assets cover short-term obligations.
Operating working capital matters even more for cash flow
Receivables and inventories tie up cash, while trade payables can temporarily finance operations.
When a company grows quickly, it may need to:
- hold more inventory;
- finance larger receivables;
- pay suppliers before customers pay;
- fund operating costs before revenue converts into cash.
A simple example
Suppose annual revenue rises by HUF 100 million, but receivables increase by HUF 25 million and inventory by HUF 10 million. If trade payables increase by only HUF 5 million, growth has absorbed HUF 30 million of operating cash.
The income statement may still show profit — but growth requires financing.
When is it a warning sign?
When receivables grow faster than revenue, inventory turnover deteriorates, or short-term liabilities grow persistently faster than current assets.
Is negative working capital always bad?
No. Some business models naturally operate with negative working capital, for example where customers pay quickly and suppliers are paid later. The business model and trend matter more than a single sign.
Why does it matter in valuation?
DCF must reflect the cash absorbed by working-capital growth. A high-growth company can be overvalued if revenue growth is modelled but the additional working-capital funding requirement is ignored.
GlobalTaxAI approach
Both Balance-Sheet Analysis and Company Valuation treat working capital explicitly. Negative working capital is not automatically forced to zero; it is interpreted in the context of the business model and historical pattern.