Working Capital
Current assets minus current liabilities, measuring a company's ability to meet short-term obligations.
What is Working Capital?
Working capital is the difference between a company's current assets (cash, accounts receivable, inventory, and other assets expected to be converted to cash within one year) and current liabilities (accounts payable, short-term debt, and other obligations due within one year). Positive working capital means a company can meet its near-term obligations; negative working capital suggests potential liquidity stress. The current ratio (current assets / current liabilities) and quick ratio (liquid current assets / current liabilities) are related metrics. Changes in working capital affect operating cash flow — growing accounts receivable or inventory consumes cash while extending accounts payable frees it.
Example
A retailer has $300M in current assets ($100M cash, $120M inventory, $80M receivables) and $200M in current liabilities ($80M accounts payable, $50M accrued expenses, $70M short-term debt). Working capital = $300M - $200M = $100M, with a current ratio of 1.5x. As holiday season approaches, inventory grows to $200M — working capital rises but cash decreases, requiring careful liquidity management.
Source: Investopedia — Working Capital