How is 'working capital' defined?

Working capital is defined as the difference between current assets and current liabilities. This measure is crucial in evaluating a company's short-term financial health and operational efficiency. Current assets include cash, accounts receivable, and inventory, which can be easily converted into cash within one year. On the other hand, current liabilities are obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debt.

By taking the current assets and subtracting current liabilities, you get a clear picture of the net resources available for day-to-day operations. Positive working capital indicates that a company has sufficient assets to cover its short-term liabilities, which is a sign of good financial health. Conversely, negative working capital suggests potential liquidity issues, where the company may struggle to meet its short-term obligations.

The other definitions provided do not accurately represent the concept of working capital. For example, long-term liabilities minus long-term assets focuses on a different aspect of financial health, while current assets divided by current liabilities represents the current ratio, a liquidity metric, but not working capital itself. Total assets minus total liabilities reflects the net worth of a company rather than its operational liquidity. Thus, defining working capital as current assets minus current liabilities aligns perfectly with its intended purpose in financial analysis