Working capital is the difference between a company's current assets and current liabilities. It measures short-term liquidity — a company's ability to pay its near-term obligations using its near-term assets. Positive working capital is generally healthy; negative indicates potential liquidity risk.
Working Capital = Current Assets − Current Liabilities
Current Assets = cash, accounts receivable, inventory, and other assets expected to convert to cash within 12 months. Current Liabilities = accounts payable, short-term debt, accrued expenses, and other obligations due within 12 months.
Example 1: Balance sheet: Cash $50K, Accounts Receivable $80K, Inventory $120K, Accounts Payable $60K, Short-term Debt $40K, Accrued Expenses $30K
Result: Working Capital = $120K (Current Ratio = 1.92 — healthy)
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