How is working capital defined?

Working capital is defined as the difference between current assets and current liabilities. This financial metric is crucial for assessing a company's short-term liquidity and operational efficiency.

Current assets include assets that a company expects to convert into cash within one year, such as cash, accounts receivable, and inventory. Current liabilities are obligations that are due within the same period, including accounts payable and short-term debt. By subtracting current liabilities from current assets, working capital provides insight into the company's ability to cover its short-term obligations with its most liquid assets.

A positive working capital indicates that a company can effectively meet its short-term liabilities and invest in its operations, while negative working capital may signal potential financial difficulties. Understanding this metric helps stakeholders gauge the financial health of a business in the short term, making it a foundational aspect of financial analysis.