Working capital refers to the excess of a company's current assets over its current liabilities. In other words, it means the short-term assets available to a business after covering its short-term liabilities.
Evaluating working capital is crucial for determining a company's liquidity and its capacity to fulfill short-term obligations, such as settling bills and repaying short-term loans as they become due.
A clear understanding of working capital involves recognizing current assets and current liabilities. Current assets are resources that can be converted to cash within a year, including cash and cash equivalents, accounts receivable, short-term investments, and prepaid expenses
Current liabilities, on the other hand, are a business's short-term obligations due within a year. Examples include accounts payable, income taxes payable, accrued interest, and creditor liabilities.
Since current liabilities are typically settled using current assets, evaluating working capital is vital for investors and creditors when assessing a company's financial stability and liquidity.
