How is working capital defined?

Working capital is defined as the difference between current assets and current liabilities. This metric provides insight into a company's short-term financial health and its ability to meet its short-term obligations.

Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used within one year. Current liabilities consist of obligations that are due within the same time frame, such as accounts payable, short-term loans, and other debts.

By calculating working capital (current assets minus current liabilities), you can assess whether a company has enough liquidity to cover its immediate liabilities. A positive working capital indicates that the company can fund its current operations and invest in future activities, while negative working capital may signal financial trouble.

Understanding working capital is crucial for decision-makers in evaluating the operational efficiency and short-term financial stability of a business.