How is working capital calculated?

Working capital is a fundamental financial metric that indicates a company's operational efficiency and short-term financial health. It is calculated by subtracting current liabilities from current assets. This calculation provides insight into what resources are available to meet short-term obligations.

Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted to cash or used up within one year. Current liabilities encompass debts and other obligations due within the same time frame, such as accounts payable, short-term loans, and other short-term financial commitments.

A positive working capital figure suggests that a company has enough short-term assets to cover its short-term liabilities, which can be an indicator of good financial health. Conversely, negative working capital may signal potential liquidity issues, indicating trouble in meeting financial obligations as they come due.

This makes the correct calculation—current assets minus current liabilities—a critical tool for assessing a company's short-term financial stability and operational effectiveness.