Working Capital

Current assets minus current liabilities; short-term operating liquidity.

Working capital is a financial metric representing the operating liquidity available to a business. It measures a company's ability to cover its short-term financial obligations with its short-term assets. This figure is calculated by subtracting current liabilities, such as accounts payable and short-term debt, from current assets, which include cash, accounts receivable, and inventory. Investors analyze working capital to assess a company's short-term financial health and operational efficiency. A positive working capital indicates that a company can fund its daily operations, pay off its immediate debts, and invest in future growth. Conversely, negative working capital suggests that a company may struggle to meet its short-term obligations, potentially leading to liquidity issues or bankruptcy if it cannot secure external financing. While positive working capital is generally favorable, excessively high working capital is not always ideal. It can indicate that a company has too much cash sitting idle, too much unsold inventory, or is failing to collect its receivables efficiently. Investors must compare working capital levels against industry peers, as capital-intensive industries typically require higher working capital than service-based or software companies.

Company A has $150,000 in current assets (consisting of $50,000 in cash, $60,000 in inventory, and $40,000 in accounts receivable) and $90,000 in current liabilities (consisting of $50,000 in accounts payable and $40,000 in short-term debt). Its working capital is calculated as $150,000 - $90,000 = $60,000.