| working capital The amount of current assets that is in excess of current liabilities. Working capital is frequently used to measure a firm's ability to meet current obligations. A high level of working capital indicates significant liquidity. Also called net current assets, net working capital. See also current ratio, quick ratio. |
Working capital. Working capital is the money that allows a corporation to function by providing cash to pay the bills and keep operations humming.
One way to evaluate working capital is the extent to which current assets, which can be readily turned into cash, exceed current liabilities, which must be paid within one year.
Some working capital is provided by earnings, but corporations can also get infusions of working capital by borrowing money, issuing bonds, and selling stock.
The difference between cash and other quick assets (current assets) and current liabilities.
What Does Working Capital Mean?
A measure of a company's efficiency and short-term financial health; a company's working capital is calculated as shown here:
Positive working capital means that the company is able to pay off its short-term liabilities, whereas negative working capital means that a company is unable to meet its short-term liabilities out of its current assets (cash, accounts receivable, and inventory). Working capital also is referred to as net working capital.
Investopedia explains Working Capital
If a company's current liabilities exceed its current assets, it may have trouble paying back its creditors in the short term. The worstcase scenario is bankruptcy. A declining working capital over a longer period should be a red flag to investors. For example, it could signal a decrease in a company's sales, and as a result, its accounts receivable (future cash flow) will shrink, meaning that future cash flows will be reduced. Working capital also reveals a company's operational efficiency. Money that is tied up in inventory or money that customers still owe (accounts receivable) cannot be used to pay off any of the company's current obligations. Therefore, if a company is not operating in the most efficient manner (slow collection), that will show up as an increase in working capital. This efficiency can be deduced by comparing working capital from one period to another; slow collection may signal an underlying problem in the company's operations.
Related Terms:
• Acid-Test Ratio
• Capital Structure
• Current Assets
• Current Liabilities
• Inventory
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