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Working Capital
The difference between current assets and current liabilities, measuring short-term liquidity.
Working Capital
Working capital measures a company's ability to meet its short-term obligations and fund day-to-day operations.
Formula
Working Capital = Current Assets − Current Liabilities
Components
Current assets
- Cash and cash equivalents
- Accounts receivable
- Inventory
- Short-term investments
Current liabilities
- Accounts payable
- Short-term debt
- Accrued expenses
- Current portion of long-term debt
Interpretation
- Positive working capital: Can cover short-term obligations (generally healthy)
- Negative working capital: May struggle to pay near-term bills (potential red flag)
- Too much working capital: May indicate inefficient use of resources
Working capital cycle
The time it takes to convert working capital into cash: Inventory → Sales → Receivables → Cash → Pay suppliers. Shorter cycles are generally better.
Industry context
Some industries (like grocery stores) operate efficiently with negative working capital because they collect cash before paying suppliers. Always compare within the same industry.
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Accounting
Difficulty
Beginner
Reading Time
1 min
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Where You'll See This
This concept appears throughout stock detail pages and financial data.