Working Capital and Liquidity

Earlier lessons introduced the balance sheet of corporate issuers, composed of assets financed by liabilities (including debt) and equity. This learning module covers the analysis of short-term assets and liabilities, those that result in cash inflows or outflows within a year. The behavior of these assets and liabilities is primarily determined by an issuer’s payment and delivery terms with its customers and suppliers. Subsequent modules cover issuers’ long-term assets, liabilities, and equity financing. Short-term assets and liabilities are a key determinant of an issuer’s ability to generate cash flows for investors, and mismatches between the timing and liquidity of assets and liabilities can have catastrophic effects on a firm. For these reasons and others, analysts closely scrutinize issuers’ cash conversion and liquidity.