Five places working capital can hide risk
Working capital is the money tied up in running the business day to day. Because it depends on estimates and terms, it is a frequent place for risk to build quietly.
1. Receivables
Compare receivable days with sales growth and with the company's stated credit terms. A rising trend can mean slower collection or looser terms. Look for provisions and write-offs in the notes.
2. Inventory
Inventory growing faster than sales may point to weaker demand, obsolete stock, or deliberate stocking. Check the notes for how inventory is valued and whether write-downs have occurred.
3. Supplier terms
Longer payable days can fund growth cheaply, but they can also signal stress. Look at whether payables are stretching beyond usual industry terms.
4. Advances and deposits
Large advances paid to suppliers or related parties, or deposits, can hold cash that does not show up as inventory or receivables. Read the notes to understand who holds them and why.
5. Cash-flow divergence
When profit rises but operating cash flow does not, the difference must be sitting somewhere on the balance sheet. Compare several years together rather than one. The working capital tool and the earnings-quality check help structure the questions.
Limits
None of these is proof of a problem. Each is a prompt to read the notes and the management discussion, and to ask for explanations.