What is the definition of working capital?

The definition of working capital is the difference between current assets and current liabilities. This measure reflects a company's short-term financial health and its efficiency in managing its operational liquidity. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted to cash or used up within one year. In contrast, current liabilities are obligations the company must settle within the same timeframe, such as accounts payable and short-term debt.

Working capital is crucial because it indicates whether a company can cover its short-term obligations with its most liquid assets. Positive working capital suggests that a company can pay off its short-term liabilities, supporting smooth operations. Conversely, negative working capital can signal potential liquidity issues, affecting operational capacity and financial stability.

This distinction makes working capital an essential metric in financial analysis, as it provides insight into a company's operational efficiency and short-term financial position.