Calculating an organization’s working capital is an essential step toward understanding its financial performance and resilience. In general, this metric reflects the available liquidity of an entity or the ability to fulfill its obligations. In a way, working capital shows how many times an organization can pay for its obligations with the currently available assets. Thus, it becomes an important tool for analyzing the financial health of this entity. The management is to keep an emphasis on this parameter, as good performance in this area sends a strong message of reliability to investors and stakeholders. The company’s resilience is also reflected by its working capital, as good figures indicate that potential crises, combined with the necessity to pay all liabilities, will not entail bankruptcy. If the working capital remains within an optimal range, suppliers, creditors, and employees can be assured of the organization’s financial health.
Considering the purpose of the working capital as a metric, its formula is represented by a company’s current assets divided by current liabilities. In this context, current assets are tangible and intangible assets that are presently owned by the organization and can be converted into cash within one year. Total liabilities are all the financial obligations that the company is likely to pay within one year. This formula produces a working capital ratio that reflects the ability of the entity to pay its liabilities with the currently available funds. If the outcome is above 1.0, the company has sufficient assets for this purpose. Therefore, the higher the ratio is, the better financial health an organization demonstrates. In the case of American Express, the working capital ratio is 1.13. This number means that the available assets exceed the company’s liabilities but not by far. American Express can fulfill its obligations in the short term, but the expenses would require a considerable portion of its assets.
Therefore, to improve the financial health and stability of the business, American Express will benefit from adjusting the current ratio toward an increase. The company’s leadership may need to control the accumulation of its liabilities, as its continuation risks swaying the working capital toward insufficiency. The key will be to maintaining the same level or higher in the upcoming years. This way, the stakeholders will remain assured of the organization’s ability to fulfill its financial obligations in spite of the possible turbulence within the industry.
The history of the company’s financial statements from previous years can show whether the organization is currently moving in the correct direction. An examination of the data between 2016 and 2020 shows interesting dynamics of the liabilities of American Express. Within the 2016-2019 period, the amount of total liabilities has been on a stable increase, from $158,893,000 to $198,321,000. Along with it, the company’s ability to withstand challenges was undermined. Nevertheless, the pinnacle of total liabilities was reached by the end of the 2019 fiscal year, at which point the tendency was inverted. In 2020, the financial statement of American Express recorded the first instance of the total liability decrease in the past five years (American Express, 2021). Of course, a single instance of it does not guarantee that the reversed trend will persist. However, it is a good sign that the company’s organizational behavior aligns with its needs to ensure a better working capital ratio in the age of uncertainty. Ultimately, the practical performance of American Express corresponds with the ideas presented above, according to which the reduction of current liabilities will improve this entity’s financial health.
Reference
American Express. (2021). Annual reports and proxy statements. Web.