Working Capital and the Cash Conversion Cycle

"Profitable but bankrupt" sounds like a contradiction, but it's a real, well-documented pattern, and understanding working capital is the key to seeing why it happens. Working capital is simply current assets minus current liabilities — a measure of whether a company has enough short-term resources on hand to cover what it owes in the near term. The more precise tool for tracking this is the Cash Conversion Cycle (CCC): Days Inventory Outstanding (how long inventory sits before being sold) plus Days Sales Outstanding (how long it takes to collect cash after a sale) minus Days Payable Outstanding (how long the company takes to pay its own suppliers).

A long, positive CCC means real cash is tied up for a meaningful stretch of time in inventory sitting on shelves and invoices waiting to be paid — even while the income statement shows a profit on paper. A company growing quickly can see receivables and inventory balloon faster than cash actually comes in, consuming its cash reserves even as net income looks healthy, which is exactly the mechanism behind a fast-growing, accounting-profitable company running into a genuine liquidity crisis.