What does working capital measure?

Working capital specifically measures the difference between current assets and current liabilities. This financial metric is crucial for assessing a company's short-term liquidity and operational efficiency.

Current assets are cash and other resources that are expected to be converted into cash or consumed within a year, such as inventory and accounts receivable. In contrast, current liabilities encompass obligations that the company must settle within the same timeframe, including accounts payable and short-term debt.

Essentially, working capital indicates how well a company can cover its short-term obligations with its short-term assets, revealing its operational health and financial stability. A positive working capital figure suggests that a company has enough resources to meet its short-term debts and invest in its operations, while a negative figure may raise concerns about its liquidity position. Thus, measuring working capital is pivotal in evaluating a company’s financial flexibility and efficiency in managing its operational cycle.