What is working capital?

Working capital is defined as the difference between a company's current assets and current liabilities. This measure indicates the short-term financial health of a business and its ability to cover its short-term obligations with its short-term assets. Current assets typically include items such as cash, accounts receivable, and inventory, while current liabilities encompass obligations that are due within one year, like accounts payable and short-term loans.

Understanding working capital is crucial for evaluating a company's liquidity position and operational efficiency. A positive working capital indicates that a company can pay off its short-term liabilities, while negative working capital may suggest potential difficulties in meeting these obligations. This concept is a key aspect of financial analysis, as it reflects a company's operational effectiveness and financial stability regarding liquidity management.