How do we evaluate the working capital situation of the business based on the balance sheet?

Working capital refers to the management of the current assets and current liabilities of the company. The company must have a positive net working capital i.e. current assets must be greater than the current liabilities. Some ratios like current ratio and quick ratio also become important here as they give you an indication of whether the company has enough liquid assets to meet its short term payables. Companies with negative working capital will have to rely on long term sources of funds to meet their working capital needs and that is a classic recipe for a maturity mismatch. As an analyst, you must also be wary of companies that have a very high current ratio or quick ratio. It could be indicative of inefficient use of resources and excess investments locked up in current assets.