One of the main reasons serious investors look at a balance sheet is to discover a company's working capital (or "current position"). Working capital reveals more about the financial condition of a business than almost any other calculation because it tells you what would be left if a company took all of its short-term resources and used them to pay off its short-term liabilities. All else equal, the more working capital a firm has on hand, the less financial strain a company experiences.
By studying a company's current position, you can see if it has the resources necessary to expand internally or if it will need to turn to a bank or financial markets to raise additional funds.
Current Assets - Current Liabilities = Working Capital
One of the main advantages of looking at the working capital position is being able to foresee many potential financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its bills when they come due. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditors and vendors - all of which result in a lower corporate credit rating.
A lower credit rating means banks and the bond market demand higher interest rates, which can cost a corporation a lot of money over time as the cost of capital rises and less revenue makes it to the bottom line.
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