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Operating Working Capital (OWC)

Guide to Understanding Operating Working Capital (OWC)

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Operating Working Capital (OWC)

How to Calculate Operating Working Capital (Step-by-Step)

The traditional textbook definition of “working capital” refers to a company’s current assets minus its current liabilities.

The “current” categorization signifies an asset that can be converted into cash within twelve months (i.e. high liquidity), or a liability that is coming due within the next twelve months.

However, a more practical variation of working capital is the operating working capital (OWC) metric, which is adjusted to only include items with an integral role in the recurring, core operations of a company.

Specifically, OWC intentionally excludes “Cash and Cash Equivalents” and “Short-Term Debt”.

  • Cash and Cash Equivalents Exclusion → The issue on-hand is that cash (and items such as short-term investments) are not necessarily an integral component of a company’s cash flow generation. In fact, the categorization of cash as a “Cash Flow from Investing” activity can be argued as more accurate than under “Cash Flow from Operations”, i.e. a company’s cash can be invested into short-debt government securities, marketable securities, certificate of deposit (CD), and more.
  • Debt and Interest-Bearing Securities Exclusion → The borrowing of capital, i.e. debt and any debt-like instruments are more akin to a “Cash Flow from Financing” activity since these items represent a method of raising the necessary capital to fund ongoing operations.

Operating Working Capital Formula (OWC)

The formula for calculating a company’s operating working capital is equal to the operating current assets subtracted by the operating current liabilities.

Operating Working Capital (OWC) = Operating Current AssetsOperating Current Liabilities

The table below provides examples of the most common operating current assets and operating current liabilities.

Operating Current Assets Operating Current Assets

OWC-to-Sales Ratio Analysis

The OWC of a company can be expressed as a percentage of sales to compare a company’s ratio to other companies within the same sector.

Calculating the OWC-to-sales ratio is relatively straightforward, as it compares a company’s OWC to sales.

OWC-to-Sales = Operating Working Capital ÷ Sales

Generally, companies should avoid the ratio from becoming too high, which is a subjective measure and entirely dependent on the industry.

  • High OWC-to-Sales Ratio → More Cash Tied-Up in Operations, i.e. Less Liquidity
  • Low OWC-to-Sales Ratio → Less Cash Tied-Up in Operations, i.e. More Liquidity

Operating Working Capital Calculator – Excel Model Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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OWC Calculation Example

Suppose a company had the following operating working capital line items in 2021.

Operating Current Assets:

Operating Current Liabilities:

By calculating the sum of each side, the following values represent the two inputs required in the operating working capital formula.

  • Operating Current Assets = $25 million + $40 million + $5 million = $70 million
  • Operating Current Liabilities = $15 million + $10 million + $5 million = $30 million

Upon netting those two values against each other, the operating working capital of our hypothetical company is $40 million.

  • OWC = $70 million – $30 million = $40 million

Operating Working Capital (OWC) Calculator

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