Working Capital

What is working capital? This is very simply the difference between your current assets and liabilities. In other words, the difference between the amount of "cash" that a company has readily available and its current debts. The current assets can be thought of as the various forms of cash that a company has available. Basically, if you can turn an asset into cash within a year without taking a loss on its value, then, generally speaking, it's a current (also called quick) asset. Current liabilities are basically anything debt/bill/obligation due within a year.

The formula for this one looks like this:
Working Capital = Current Assets - Current Liabilities

What to remember:

  • Working capital deals with the short term financial health of a company.
  • It can be a good indicator of whether or not the company is operating efficiently.
  • This is a good figure to know, but it doesn't tell the whole story.
  • This shows whether a company's short-term assets can cover its short-term debts.