BS2203 Working Capital, Gearing & Interest Coverage Explained fully

📘 BS2203 Working Capital, Gearing
& Interest Coverage Explained
Lecture Notes – Financial Analysis BS2203

BurnerBoy University | Advanced Level 7/10

Includes:

• Easy-to-follow lecture notes
• Examples and breakdowns
• Practice Questions + Answers




📍 Part 1: Working Capital – The Lifeline of Operational
Liquidity

🔹 What Is Working Capital?

Working Capital = Current Assets – Current Liabilities

It represents the short-term liquidity and operational efficiency of a business.



🔹 Components:

Current Assets Current Liabilities
Cash & Cash
Accounts Payable
Equivalents
Accounts Receivable Short-term Loans

, Inventory Accrued Expenses
Prepaid Expenses Taxes Payable



🔹 Types of Working Capital

• Gross Working Capital: Total current assets
• Net Working Capital: CA – CL
• Operating WC: (AR + Inventory – AP)



🔹 Key Metrics:

Metric Formula Interpretation
Current Assets / Current
Current Ratio Healthy if > 1.5; watch if < 1
Liabilities
Quick Ratio (CA – Inventory) / CL Tough test of liquidity (no inventory)
Cash Conversion Cycle Lower is better; fast working capital
DIO + DSO – DPO
(CCC) cycle



📌 Example:

If:

• AR = 40,000
• Inventory = 60,000
• AP = 30,000

Operating WC = 40,000 + 60,000 – 30,000 = 70,000