What does working capital represent?

Working capital represents the difference between current assets and current liabilities, providing a clear picture of a company's short-term financial health and operational efficiency. It indicates whether a firm has enough short-term assets to cover its short-term obligations.

Current assets include cash, accounts receivable, and inventory, while current liabilities consist of accounts payable and other debts due within a year. A positive working capital means the company can easily fund its day-to-day operations and meet its short-term financial obligations. Conversely, negative working capital may indicate financial difficulties.

In contrast to the current assets minus current liabilities, total equity, long-term debt, and overall net income do not directly relate to the liquidity and operational efficiency that working capital measures. Total equity refers to the ownership interest in the firm, long-term debt pertains to obligations that are due in more than one year, and net income reflects profitability over a period rather than short-term financial health. Thus, the correct understanding of working capital hinges on its definition as the difference between current assets and current liabilities.