How is Working Capital defined?

Working capital is defined as the difference between current assets and current liabilities. This measure indicates the short-term liquidity of a company, essentially revealing how well it can cover its short-term obligations with its short-term assets.

Current assets include cash, accounts receivable, inventory, and other assets expected to be converted into cash or used up within one year. Current liabilities encompass obligations that the company needs to settle within the same time frame, such as accounts payable, short-term debt, and accrued liabilities.

By using the formula of current assets minus current liabilities, you illustrate how much capital is available for day-to-day operations after covering immediate financial obligations. If a company has a positive working capital, it generally suggests a healthy financial position, allowing it to invest in growth or meet unforeseen expenses. Conversely, negative working capital may indicate financial trouble.

Understanding working capital is crucial in investment banking as it provides insights into the operational efficiency and financial health of a company, which are critical factors in valuation and financial analysis.