The Change in Working Capital is a measure of a company's operational liquidity. It is the difference between current assets and current liabilities from one period to another. It is a key indicator of a company's short-term financial health and efficiency.
Expand the concept slightly, the change in working capital gives an idea of how much a company's short-term assets (like cash, inventory, and accounts receivable) and liabilities (like accounts payable and short-term debt) have varied from one period to another. It provides insight into a company's operating cycle and its ability to manage its cash flow.
An increase in working capital indicates that a company has more assets to cover its short-term debts, suggesting improved liquidity. A decrease might indicate a decline in short-term assets or an increase in short-term debts, potentially signaling liquidity problems. However, context is crucial. For example, a decrease in working capital due to increased sales can be a positive sign.
Therefore, while the change in working capital is a vital measure of financial performance, it is best understood in the context of a company's industry, size, growth phase, and other financial metrics.
For Caterpillar, changes in working capital might result from fluctuations in inventory (due to production cycles), accounts receivable (reflecting sales cycles), and accounts payable (reflecting payment terms with suppliers).
Google's change in working capital can be influenced by shifts in accounts receivable (linked to advertising revenue cycles), cash and short-term investments (reflecting its investment strategies), and accounts payable (reflecting its contractual obligations).
For Costco, changes in working capital would largely reflect variations in inventory (linked to buying patterns), cash (reflecting sales and operational efficiency), and accounts payable (reflecting payment terms with suppliers).