What does working capital represent?

Working capital is a financial metric that indicates a company's operational efficiency and short-term financial health. It is calculated as current assets minus current liabilities. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within one year. Current liabilities consist of obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debts.

By subtracting current liabilities from current assets, working capital provides insight into the liquidity position of an organization. Positive working capital suggests that a company can meet its short-term obligations and continue its operations without financial stress. On the other hand, negative working capital may indicate difficulties in managing day-to-day operations and fulfilling financial commitments.

The concept of working capital is essential for assessing operational efficiency, cash flow management, and short-term financial stability, which is precisely why this choice accurately reflects its definition and significance in financial analysis.