In this article, I will explain the working capital (WC) calculation for Nestlé Nigeria Plc for its 2020 financial report. You can use the statement of financial position to calculate the WC of any company with no exception. This tells you more about the liquidity of a company but doesn’t tell you all. This article will help you understand WC better.
Working capital or net working capital explains whether an entity can meet current obligations (debts repayment and expenses) as they fall due. The formula is simply current assets minus current liabilities. You can have a positive WC or net current assets as it is sometimes called if the value of the current assets is greater than than the current liabilities.
On the other hand, you will have negative working capital or net current liabilities or over-trading, if the current liabilities are greater than current assets. Over-trading means the business is financing its operations by relying more on current liabilities. To mitigate the risk here, companies borrow in the longer term.
Computing Nestlé Plc Working Capital
To begin, download the 2020 annual report of Nestlé Nigeria Plc here. Now add up all the line items for current assets and current liabilities separately. Next, subtract the current liabilities from the current assets. The value you get is working capital. Below is the screenshot of working capital computation from the Microsoft Excel spreadsheet.
From the screenshot, the current assets figures are 151,501,455 and 107,037,484 for 2020 and 2019 respectively. Also, the current liabilities are 166,030,352 and 125,535,430 accordingly. If you subtract 2020 current assets from its current liabilities (that is, 151,501,455 – 166,030,352) you get -14,528,897 working capital. More so, for 2019 (107,037,484 – 125,535,430) gives -18,497,946.
In both years, Nestlé shows negative working capital. This implies that the company is overtrading. It spends most of its finances on purchasing inventories and trade receivables. While keeping a higher short-term debt profile through trade payables.
How then can Nestlé meet its current liabilities obligations if its current assets cannot finance it? The next option will be through long-term debt. You can find it in the “statement of financial position” section of the company’s annual report. If you look closely, the company’s non-current liabilities cannot finance current liabilities. In 2020, the non-current liabilities were 50,857,661 in thousand Naira. This cannot pay up to 50% of its trade and trade payables of 116,512,689 in that year.
In general, the company might be facing liquidity challenges. Whatever the case, Nestlé Nigeria Plc directors will have to deal with its working capital management. More specifically, the company is a strong one in the Nigerian consumer goods industrial space. Its products are famous and no single soul in the country can claim it has not consumed at least one of its products.
Working capital is the difference between current assets and current liabilities. It tells you more about the company’s liquidity. A positive value shows the entity is liquid. That is, has the cash to clear up current liabilities. But a negative value speaks otherwise. However, before concluding, you must check if there is enough long-term debt to fund the current debts of the entity.