Your analysis of two companies reveals identical levels of working capital.
QUESTION
Your analysis of two companies reveals identical levels of working capital. Are you confident in concluding their liquidity positions are equivalent?
Working capital levels can vary depending on the size of the firm. A company with larger revenues (product based) would require larger level of working capital than a company with smaller revenues. If 2 companies have same levels of working capital, it is not possible to comment on their liquidity position unless their size of business are known to us. Also, working capital requirements also depend on the industry in which the firm operates. Some industries require more working capital than
others. Even companies in the same industry manufacturing differentproducts may require different levels of working capital Thus, assuming the companies operate in same industry, manufacture similar product and are of similar size (in terms of revenue), identical levels of working capital can imply equivalent liquidity positions.
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