What is meant by "working capital"?

Working capital is defined as the difference between current assets and current liabilities. This metric is crucial for understanding a company's short-term financial health and operational efficiency. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be liquidated or consumed within a year. Current liabilities, on the other hand, are obligations that the company needs to settle within the same time frame, such as accounts payable and short-term debt.

A positive working capital indicates that a company has sufficient assets to cover its short-term liabilities, which is essential for maintaining liquidity and supporting day-to-day operations. Conversely, negative working capital may signal that a company could struggle to meet its short-term obligations, potentially leading to financial difficulties. Thus, understanding working capital is fundamental for analyzing a company's financial stability and operational capability.