What Does Negative Working Capital Mean?
Negative working capital is when a company's current liabilities exceed its current assets. This means that the liabilities that need to be paid within one year exceed the current assets that are monetizable over the same period.
A buyer usually considers negative working capital in a target as detrimental because it signifies additional capital that will be required to run the business after closing. A buyer actually prefers to see a working capital ratio of 1 to 1.5 times, which means there is at least one dollar of current assets for every dollar of current liabilities. This assures the buyer that the company can generate sufficient cash over the short term to cover supplier and payroll obligations.