{"id":31503,"date":"2025-07-02T05:00:58","date_gmt":"2025-07-02T10:00:58","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=31503"},"modified":"2025-12-17T00:18:23","modified_gmt":"2025-12-17T05:18:23","slug":"negative-working-capital","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/negative-working-capital\/","title":{"rendered":"Negative Working Capital: Good Sign, Red Flag, or Much Ado About Nothing?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Negative Working Capital: Good Sign, Red Flag, or Much Ado About Nothing?<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/negative-working-capital\/#Defining_Working_Capital_and_Explaining_Why_Negative_Working_Capital_Means_Little\">Defining Working Capital and Explaining Why Negative Working Capital Means Little<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/negative-working-capital\/#More_Positive_and_Negative_Working_Capital_Examples\">More Positive and Negative Working Capital Examples<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/negative-working-capital\/#Does_Negative_Working_Capital_Ever_%E2%80%9CMatter%E2%80%9D\">Does Negative Working Capital Ever \u201cMatter?\u201d<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Negative Working Capital Definition:<\/strong> Negative Working Capital occurs when a company\u2019s Current Operational Liabilities exceed its Current Operational Assets; it could mean almost anything, depending on the company and industry, and it tends to matter far less in models and valuations than the *Change* in Working Capital.<\/p><\/blockquote>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31504 size-full\" title=\"Walmart - Negative Working Capital\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045557\/01-Walmart-Negative-Working-Capital.jpg\" alt=\"Walmart - Negative Working Capital\" width=\"600\" height=\"219\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045557\/01-Walmart-Negative-Working-Capital.jpg 600w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045557\/01-Walmart-Negative-Working-Capital-300x110.jpg 300w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/p>\n<p>Initially, many sources claimed that positive Working Capital was \u201cgood,\u201d while negative Working Capital was \u201cbad\u201d because it meant that companies could not repay their short-term obligations with their short-term Assets.<\/p>\n<p>This was not accurate because not all short-term obligations needed to be \u201crepaid,\u201d and not all short-term Assets could be readily converted into payments.<\/p>\n<p>Authors and educators then started saying that negative Working Capital could exist for \u201cbad\u201d or \u201cgood\u201d reasons, so it was context-dependent:<\/p>\n<ul>\n<li><strong>GOOD: <\/strong>Negative Working Capital exists because the company collects invoices and cycles through Inventory quickly (low AR and Inventory balances) or because it collects a lot of cash upfront (high Deferred Revenue). The <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/cash-conversion-cycle\/\" target=\"_blank\" rel=\"noopener\">Cash Conversion Cycle<\/a> is short.<\/li>\n<li><strong>BAD: <\/strong>Negative Working Capital exists because the company\u2019s sales are falling, leading to lower AR and Inventory, or because it has such poor cash flow it can\u2019t even pay its suppliers on time or at all.<\/li>\n<\/ul>\n<p>These explanations were better, but there were still two major issues.<\/p>\n<p>First, Working Capital by itself, whether positive or negative, doesn\u2019t matter much for valuation purposes; the <em><a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\" rel=\"noopener\">Change in Working Capital<\/a><\/em> is far more significant.<\/p>\n<p>Also, even when negative Working Capital means something, that meaning is <em>usually<\/em> obvious from other metrics, such as the growth rates, margins, and interest coverage ratios.<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31505 size-full\" title=\"Working Capital - Low\/High IQ Meme\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045625\/02-Working-Capital-IQ.jpg\" alt=\"Working Capital - Low\/High IQ Meme\" width=\"673\" height=\"497\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045625\/02-Working-Capital-IQ.jpg 673w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045625\/02-Working-Capital-IQ-300x222.jpg 300w\" sizes=\"(max-width: 673px) 100vw, 673px\" \/><\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Negative-WC\/105-36-Negative-Working-Capital-Examples.xlsx\" target=\"_blank\" rel=\"noopener\">Negative Working Capital Examples (XL)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Negative-WC\/105-36-Negative-Working-Capital-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Negative Working Capital &#8211; Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Negative-WC\/105-36-Walmart-10-K.pdf\" target=\"_blank\" rel=\"noopener\">Walmart &#8211; Highlighted 10-K (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Negative-WC\/105-36-Dollar-Tree-10-K.pdf\" target=\"_blank\" rel=\"noopener\">Dollar Tree &#8211; Highlighted 10-K (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Negative-WC\/105-36-Salesforce-10-K.pdf\" target=\"_blank\" rel=\"noopener\">Salesforce &#8211; Highlighted 10-K (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Negative-WC\/105-36-Illinois-Tool-Works-10-K.pdf\" target=\"_blank\" rel=\"noopener\">Illinois Tool Works &#8211; Highlighted 10-K (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Negative-WC\/105-36-McDonalds-10-K.pdf\" target=\"_blank\" rel=\"noopener\">McDonald&#8217;s &#8211; Highlighted 10-K (PDF)<\/a><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>0:52:<\/strong> The Short Version<\/li>\n<li><strong>4:35:<\/strong> Part 1: Dollar Tree vs. Walmart Comparison<\/li>\n<li><strong>7:53:<\/strong> Part 2: Positive and Negative Working Capital Examples<\/li>\n<li><strong>12:05:<\/strong> Part 3: OK, But Can Negative Working Capital Ever Matter?<\/li>\n<li><strong>13:21:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Defining_Working_Capital_and_Explaining_Why_Negative_Working_Capital_Means_Little\"><\/span><strong>Defining Working Capital and Explaining Why Negative Working Capital Means Little<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When working with this metric, you should use Working Capital <strong>as it is defined on the Cash Flow Statement <\/strong>in the \u201cChange in Working Capital\u201d or \u201cChange in Operating Assets and Liabilities\u201d sections, sometimes with modifications.<\/p>\n<p>For example, on Dollar Tree\u2019s financial statements, it does not make sense to include the Operating Lease Liabilities within Working Capital, even though the company lists the Changes in both items in this section:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31506 size-full\" title=\"Dollar Tree - Working Capital\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045731\/03-Dollar-Tree-Working-Capital.jpg\" alt=\"Dollar Tree - Working Capital\" width=\"1168\" height=\"211\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045731\/03-Dollar-Tree-Working-Capital.jpg 1168w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045731\/03-Dollar-Tree-Working-Capital-300x54.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045731\/03-Dollar-Tree-Working-Capital-1024x185.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045731\/03-Dollar-Tree-Working-Capital-768x139.jpg 768w\" sizes=\"(max-width: 1168px) 100vw, 1168px\" \/><\/p>\n<p>Leases Assets and Lease Liabilities are Balance Sheet line items, but they are longer-term and relate to multi-year contracts rather than day-to-dash cash collection, payments, and deliveries.<\/p>\n<p>Financing-related items such as Cash, Investments, and Debt should also not be a part of Working Capital, so we are assuming something closer to \u201cOperating Working Capital\u201d here.<\/p>\n<p>Walmart\u2019s Working Capital is more straightforward and follows directly from its Cash Flow Statement.<\/p>\n<p>Our calculations for Dollar Tree and Walmart look like this:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31507 size-full\" title=\"Walmart vs. Dollar Tree - Positive vs. Negative Working Capital\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045800\/04-Walmart-vs-Dollar-Tree.jpg\" alt=\"Walmart vs. Dollar Tree - Positive vs. Negative Working Capital\" width=\"1216\" height=\"239\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045800\/04-Walmart-vs-Dollar-Tree.jpg 1216w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045800\/04-Walmart-vs-Dollar-Tree-300x59.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045800\/04-Walmart-vs-Dollar-Tree-1024x201.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045800\/04-Walmart-vs-Dollar-Tree-768x151.jpg 768w\" sizes=\"(max-width: 1216px) 100vw, 1216px\" \/><\/p>\n<p>So, Dollar Tree has positive Working Capital, while Walmart has negative Working Capital, and they\u2019re both retailers (though Walmart is far bigger).<\/p>\n<p>Does this mean anything?<\/p>\n<p>No!<\/p>\n<p>First off, they both have <em>mostly positive<\/em> Changes in Working Capital, and the Change in Working Capital affects <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow<\/a> and the valuation from a <a href=\"https:\/\/mergersandinquisitions.com\/dcf-model\/\" target=\"_blank\" rel=\"noopener\">DCF model<\/a>.<\/p>\n<p>Second, Walmart has about 35x the revenue of Dollar Tree and more consistent growth rates.<\/p>\n<p>Third, Walmart has higher <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/roic-vs-roe-and-roe-vs-roa\/\" target=\"_blank\" rel=\"noopener\">ROA, ROIC, and ROE metrics<\/a>, so it is using its capital more efficiently than Dollar Tree to generate after-tax profits.<\/p>\n<p>Also, Dollar Tree is divesting its Family Dollar business, which means its current financial picture is \u201cmurky.\u201d<\/p>\n<p>For all these reasons, it\u2019s no surprise that Walmart trades at much higher <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/valuation-multiples\/\" target=\"_blank\" rel=\"noopener\">valuation multiples<\/a>:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31508 size-full\" title=\"Walmart vs. Dollar Tree - Valuation Multiples\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045838\/05-Walmart-vs-Dollar-Tree-Valuation-Multiples.jpg\" alt=\"Walmart vs. Dollar Tree - Valuation Multiples\" width=\"1215\" height=\"265\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045838\/05-Walmart-vs-Dollar-Tree-Valuation-Multiples.jpg 1215w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045838\/05-Walmart-vs-Dollar-Tree-Valuation-Multiples-300x65.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045838\/05-Walmart-vs-Dollar-Tree-Valuation-Multiples-1024x223.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045838\/05-Walmart-vs-Dollar-Tree-Valuation-Multiples-768x168.jpg 768w\" sizes=\"(max-width: 1215px) 100vw, 1215px\" \/><\/p>\n<p>\u201cWorking Capital Bros\u201d might look at this and say, \u201cBut wait a minute! Walmart is also managing its Working Capital more effectively! The consistent increase in its Accounts Payable, which boosts its cash flows, means it has considerable pricing\/negotiating\/market power.\u201d<\/p>\n<p>Yes, that\u2019s true, but both companies have <em>mostly positive<\/em> Change in Working Capital figures:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31509 size-full\" title=\"Walmart vs. Dollar Tree - Change in Working Capital\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045907\/06-Change-in-Working-Capital.jpg\" alt=\"Walmart vs. Dollar Tree - Change in Working Capital\" width=\"1218\" height=\"425\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045907\/06-Change-in-Working-Capital.jpg 1218w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045907\/06-Change-in-Working-Capital-300x105.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045907\/06-Change-in-Working-Capital-1024x357.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045907\/06-Change-in-Working-Capital-768x268.jpg 768w\" sizes=\"(max-width: 1218px) 100vw, 1218px\" \/><\/p>\n<p>Also, we can tell just from Walmart\u2019s <em>size<\/em> that it has considerable market power.<\/p>\n<p><strong>So, the fact that Walmart has negative Working Capital matters little next to everything else and tells us almost nothing new\/useful.<\/strong><\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"More_Positive_and_Negative_Working_Capital_Examples\"><\/span><strong>More Positive and Negative Working Capital Examples<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To illustrate examples in other industries, we\u2019ll look at <strong>Salesforce.com [CRM]<\/strong>, <strong>Illinois Tool Works [ITW]<\/strong>, and <strong>McDonald\u2019s [MCD]<\/strong>.<\/p>\n<p>Salesforce is an enterprise software company and a Software-as-a-Service (SaaS) pioneer, ITW is a manufacturing company with physical products, and McDonald\u2019s is mostly a franchise-based company that collects royalties and owns some of its locations.<\/p>\n<p>(Yes, McDonald\u2019s is a fast-food restaurant chain, but <em>the company<\/em> itself operates under a franchise model, where individual franchisees pay royalties to the company to operate restaurants under the McDonald\u2019s brand.)<\/p>\n<p>Each one has a different Working Capital and Change in Working Capital, but <strong>in all cases<\/strong>, the sign and magnitude of Working Capital matter little.<\/p>\n<p>Let\u2019s start with Salesforce:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31510 size-full\" title=\"Salesforce - Negative Working Capital\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045938\/07-Salesforce-Working-Capital.jpg\" alt=\"Salesforce - Negative Working Capital\" width=\"650\" height=\"442\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045938\/07-Salesforce-Working-Capital.jpg 650w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02045938\/07-Salesforce-Working-Capital-300x204.jpg 300w\" sizes=\"(max-width: 650px) 100vw, 650px\" \/><\/p>\n<p>Salesforce has <strong>negative Working Capital<\/strong> because of its business model: It sells subscription-based software, and it collects significant cash upfront in advance of the delivery and revenue recognition.<\/p>\n<p>As a result, it has a high Deferred Revenue balance, at nearly ~20% of Total Liabilities and Equity, and its Change in Deferred Revenue is consistently positive, boosting its cash flow.<\/p>\n<p>Despite all that, its Change in Working Capital is <strong>\u201cmixed\u201d<\/strong> \u2013 flipping between barely positive and barely negative \u2013 because the increase in Deferred Revenue is not enough to offset the increases in AR, Prepaid Expenses, and Deferred Commissions.<\/p>\n<p>So, the Change in Working Capital will <em>reduce<\/em> Salesforce\u2019s Free Cash Flow, hurting its valuation in a DCF.<\/p>\n<p><strong>Illinois Tool Works<\/strong> has a positive Working Capital and a mixed-but-mostly negative Change in Working Capital:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31511 size-full\" title=\"Illinois Tool Works - Positive Working Capital\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02050007\/08-ITW-Working-Capital.jpg\" alt=\"Illinois Tool Works - Positive Working Capital\" width=\"642\" height=\"487\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02050007\/08-ITW-Working-Capital.jpg 642w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02050007\/08-ITW-Working-Capital-300x228.jpg 300w\" sizes=\"(max-width: 642px) 100vw, 642px\" \/><\/p>\n<p>The main factor is that its <strong>Receivables<\/strong> and <strong>Inventory<\/strong> balances far exceed its <strong>Payables<\/strong> and <strong>Accrued Expenses<\/strong>.<\/p>\n<p>For a manufacturing company with mostly enterprise clients, this is not surprising: They must order the required Inventory in advance, and it takes time to collect cash from customers (large companies usually have more involved payment processes).<\/p>\n<p>But this doesn\u2019t mean that ITW is a \u201cbad\u201d company or that it\u2019s not managing its Working Capital efficiently; it\u2019s just a product of its industry and customer base.<\/p>\n<p>The Change in Working Capital here reduces its Free Cash Flow, but we would expect a negative impact for most companies with physical products.<\/p>\n<p>Finally, McDonald\u2019s often has negative Working Capital as well:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31512 size-full\" title=\"McDonald's - Negative Working Capital\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02050033\/09-McDonalds-Working-Capital.jpg\" alt=\"McDonald's - Negative Working Capital\" width=\"642\" height=\"444\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02050033\/09-McDonalds-Working-Capital.jpg 642w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/07\/02050033\/09-McDonalds-Working-Capital-300x207.jpg 300w\" sizes=\"(max-width: 642px) 100vw, 642px\" \/><\/p>\n<p>Since it\u2019s mostly a <strong>franchise company<\/strong>, it has lower AR and Inventory than a company that directly owns and operates all its locations.<\/p>\n<p>Despite that, the Change in Working Capital on its CFS is negative, meaning that its Working Capital management will <em>reduce<\/em> its FCF in a DCF-based valuation.<\/p>\n<p>The McDonald\u2019s example encapsulates many of the points above: Yes, there\u2019s a specific reason <em>why<\/em> its Working Capital is negative, and it tells you something about its business\u2026<\/p>\n<p>\u2026but it\u2019s also pointless because we can tell that it uses a mixed franchise\/direct ownership model by reading page 1 of its 10-K or looking at its Income Statement.<\/p>\n<p>The business model\u2019s impact on Working Capital is more of a \u201cside effect\u201d than anything else.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Does_Negative_Working_Capital_Ever_%E2%80%9CMatter%E2%80%9D\"><\/span><strong>Does Negative Working Capital Ever \u201cMatter?\u201d<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>People often bring up two specific examples to argue that negative Working Capital matters:<\/p>\n<ol>\n<li><strong>Stressed and Distressed Companies<\/strong> \u2013 They argue that negative Working Capital can signal big trouble for these types of firms, as it often indicates falling sales, an inability to pay suppliers on time, and cash-flow problems.<\/li>\n<li><strong>Small Businesses and Startups<\/strong> \u2013 Even if these types of firms are growing rapidly, they could run into trouble if their Working Capital is managed poorly (e.g., if they take too long to collect from customers).<\/li>\n<\/ol>\n<p>Argument #1 is not that convincing because <strong>there are much bigger problems than Working Capital<\/strong> for stressed and distressed companies.<\/p>\n<p>For example, if a distressed retailer cannot pay for an upcoming interest payment or Debt maturity, that is a looming disaster; negative Working Capital just makes it slightly worse.<\/p>\n<p>You often adjust companies\u2019 Working Capital numbers in stressed and distressed scenarios, but it\u2019s far less important than capital structure analysis.<\/p>\n<p>There is more validity to the second claim about startups and small businesses.<\/p>\n<p>Some firms in this category do indeed struggle with their cash flows, and a negative Working Capital can be a leading indicator of this.<\/p>\n<p>Also, it gives you <em>new information<\/em> that you would not be able to discern from the growth rates, margins, or even the returns-based metrics in this case.<\/p>\n<p>Therefore, if you work with or analyze these types of companies frequently, negative Working Capital could be worth paying attention to, even if it\u2019s not necessarily a \u201cred flag.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Negative Working Capital occurs when a company\u2019s Current Operational Liabilities exceed its Current Operational Assets; it could mean almost anything, depending on the company and industry, and it tends to matter far less in models and valuations than the *Change* in Working Capital.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-31503","biws_kb","type-biws_kb","status-publish","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/31503","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=31503"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}