How is 'working capital' defined?

Working capital is defined as current assets minus current liabilities. This measure is crucial for understanding a company's short-term financial health and efficiency. Current assets are assets that are expected to be converted into cash or used up within a year, such as cash, inventory, and accounts receivable. Current liabilities are obligations that the company needs to settle within the same time frame, including accounts payable and short-term debt.

By subtracting current liabilities from current assets, working capital provides insight into whether a company has enough short-term assets to cover its short-term obligations. A positive working capital indicates that a company can comfortably meet its upcoming liabilities, while a negative working capital may suggest potential financial difficulties.

This concept is essential in financial analysis because it helps assess the liquidity and operational efficiency of a business, guiding investors and stakeholders in their decision-making processes.

Other options do not align with the definition of working capital. For instance, total assets minus total liabilities equates to equity, which signifies net worth rather than operational liquidity. Net income plus depreciation relates to cash flow considerations but does not specifically measure working capital. Total revenue minus expenses calculates profit, again unrelated to the immediate assessment of a company's current asset efficiency.