Interpreting Negative Working Capital Companies

Modified: 03-Jul-20

The current article in this series provides responses related to:

  • How to interpret companies with negative working capital?

 

How to interpret companies with negative working capital?

Hi Dr. Vijay

  1. Negative working capital is usually considered not favourable as the current liabilities being higher than current assets is not a good sign.

But, at times, we have also read that negative working capital is good too. For example, if the cash conversion cycle is negative then your inflow of funds are more and faster than the outflow of funds and hence may result in the negative working capital. Is my understanding correct?

How to analyse negative working capital and find which situations are good and which situations are bad?

  1. When the overall markets are richly valued or frothy, and if you find good companies at fair or undervaluation, then from where do you draw the conviction to invest in them? Because I often get confused and wait for the overall market to also correct along with these companies so that I can invest at much lower valuation 🙂

Is this approach correct?

Author’s Response:

Hi,

Thanks for writing to us.

1) If the negative working capital is on account of liquidity crunch and not on account of higher bargaining power over vendors/suppliers, then there would be other signs of financial stress in the company like burgeoning debt, delay in project execution, debt servicing requirements being more than CFO etc.

Advised reading: How to do Financial Analysis of Companies

2) The conviction to invest is usually drawn from the process of stock analysis and selection. You may read more about our stock selection process and the steps to arrive at the price to pay for any stock in the following article:

3 Principles to Decide the Investable P/E Ratio of Stocks

If any stock is able to score successfully on all our parameters including the valuation, then we invest in it regardless of the market/Nifty/Sensex valuations.

We are able to elaborate/clarify the approach that we follow. We do not have any opinion on the approach being followed by other investors including your approach.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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