Net working capital as a proportion of total assets. One of the five components of the Altman Z-Score. Above 0.2 is healthy. Negative values mean short-term debts exceed short-term assets, a warning sign for most companies.
Formula
Description
Measures the proportion of total assets funded by net working capital. This is one of the five components of the Altman Z-Score. It reflects both liquidity and the relative size of the company's short-term financial cushion.
Interpretation
Above 0.2 is generally healthy. Below 0.1 may indicate tight liquidity. Negative values mean current liabilities exceed current assets, which is a warning sign for most industries (though common in some subscription-based businesses).
Related Quality Indicators
The percentage of revenue left after paying all operating expenses but before interest and taxes. This shows how efficiently the core business runs. Above 15% is generally strong. Consistently expanding margins signal improving business quality.
The percentage of every revenue dollar that becomes bottom-line profit after all expenses. Above 10% is strong for most industries. Persistently high net margins often indicate a company has a competitive moat protecting its business.
Profitability before the effects of debt, taxes, and depreciation. Useful for comparing companies across different tax jurisdictions and capital structures. Above 20% is generally strong. Often used in merger and acquisition analysis.
The percentage of revenue that converts to free cash flow. This is arguably the most honest profitability metric because free cash flow is difficult to manipulate. Above 10% is strong. Capital-light businesses like software companies tend to have the highest FCF margins.
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