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The Daily Technical #143: What does inventory turnover measure and how does it differ from days inventory held (DIH)?

How to answer "Is negative working capital a bad signal about a company's health? "

March 31, 2025

Good afternoon. Welcome to the 143rd edition of The Daily Technical.

Now, you’re here for one reason, so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Is negative working capital a bad signal about a company's health?

When evaluating negative working capital, consider both positive and negative implications.

On the positive side, it may indicate efficiency in collecting revenues, fast inventory turnover, and strategic payment delays, enabling cash to be invested profitably.

Conversely, it might suggest looming liquidity challenges, such as mismanaged cash, high accounts payable, insufficient inventory, and low accounts receivable.

In this case, external financing is necessary to maintain operations.

Understanding the context is crucial in determining whether negative working capital signals financial health or distress.

Common Mistakes

  1. Assuming negative working capital is always bad. Assess industry norms and specific business models. High turnover industries like retail might indicate efficiency, not distress.

  2. Overlooking industry influence on working capital. Compare the company's figures to industry benchmarks to understand whether negative working capital is typical or a red flag.

  3. Ignoring the potential need for external funding. Assess if negative working capital stems from strategic choices or if it indicates an urgent need for external financing to maintain operations.

TL;DR

  • Negative working capital can indicate efficient revenue collection, rapid inventory turnover, and strategic payment delays.

  • Positive outcomes include profitable reinvestment of excess cash into high-yield opportunities.

  • Conversely, it may signal cash mismanagement, high payables, low inventory, and insufficient accounts receivable.

  • Such scenarios might require external financing to prevent liquidity issues.

  • Assess company-specific context to determine if negative working capital reflects health or distress.

TODAY’S QUESTION
What does inventory turnover measure and how does it differ from days inventory held (DIH)?

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

DEAL TALK
Sycamore Partners Acquires Walgreens Boots Alliance (WBA) for $10 Billion

Sycamore is betting big on retail pharmacy, aiming to revive Walgreens through privatization and strategic restructuring amidst declining profitability.

THAT’S A WRAP
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