Is negative working capital bad? No, not necessarily. 

Working capital = Current Assets – Current Liabilities

This past week, I was discussing the concept of working capital. At a surface level, most students realized the benefits of having positive working capital: liquidity. 

Current assets are defined as any asset that can be converted to cash within one year (or within the operating cycle, if longer) while current liabilities are obligations that are due within that year. Therefore, having enough assets in the near term that could be converted to cash to pay down near-term liabilities seemed a simple question of liquidity. Firms that had higher working capital balances would be more liquid as compared to those that had lower working capital balances. 

When I asked if this could be a sign of financial distress, I saw general agreement. Looking at the example of Bed Bath & Beyond (BBBY), which filed for bankruptcy in April 2023, we can see that its working capital was -$1.4bn ($1.1bn-$2.5bn) in 2023, down from $288mm ($2.3bn-$2.1bn) in 2022. Here, we should note the driver of the change, cash burn, reduced inventory on hand, financial obligations due/coming due at faster pace due to bankruptcy concerns. Concerning.

Does this suggest the following companies are in distress due to negative working capital?

Walmart (WMT) -$17bn
Amazon (AMZN): -$9bn
Home Depot (HD): -$9bn
Apple (AAPL): -$7bn
Target (TGT): -$2bn
Starbucks (SBUX): -$2bn

Not exactly. It may actually signal a competitive edge in such cases.