What is working capital?

Working capital is defined as the difference between a company’s current assets and current liabilities. This metric is crucial for assessing a company's short-term financial health and operational efficiency. Current assets include cash, accounts receivable, and inventory, as these are assets that are expected to be converted into cash or consumed within a year. Current liabilities, on the other hand, consist of obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term loans.

By subtracting current liabilities from current assets, working capital provides a clear picture of whether a company has sufficient short-term assets to cover its short-term debts. A positive working capital indicates that a company can pay off its obligations and invest in operations, while negative working capital can signal potential liquidity issues. Therefore, understanding working capital is essential for evaluating a business's financial stability and operational capabilities.

Other options like the total value of current assets alone, total debts and obligations, or a ratio of liquid assets to liabilities don’t capture the essence of working capital, as they either overlook the liabilities component or describe different financial metrics rather than specifically working capital.