How is working capital calculated?

Working capital is calculated by subtracting current liabilities from current assets. This financial metric represents the short-term financial health of a business and its ability to meet its short-term obligations with its most liquid assets.

The formula for working capital is:

Working Capital = Current Assets - Current Liabilities

Current assets include resources that are expected to be converted into cash within one year, such as cash, accounts receivable, and inventory. Current liabilities encompass obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debt.

A positive working capital indicates that a company has sufficient short-term assets to cover its short-term liabilities, which is a good signal of financial stability. Thus, it is essential to understand this calculation as it reflects the operational efficiency and short-term liquidity position of a business.