What does working capital measure?

Working capital measures the difference between current assets and current liabilities. This financial metric indicates a company's short-term liquidity position and its ability to cover its short-term obligations. Current assets include assets that are expected to be converted into cash or used up within one fiscal year, such as cash, accounts receivable, and inventory. Current liabilities, on the other hand, are obligations that the company needs to settle within the same timeframe, like accounts payable and short-term debt.

By calculating working capital, businesses can assess whether they have enough short-term assets to manage their immediate liabilities, which is crucial for maintaining smooth operations. A positive working capital suggests that a company is in a good position to meet its short-term financial obligations, while a negative working capital indicates potential liquidity issues. This concept plays a vital role in financial analysis and operational management.