What is net working capital?

Net working capital is defined as current assets minus current liabilities. This financial metric is crucial for assessing a company's short-term liquidity, operational efficiency, and financial health. Current assets include items such as cash, accounts receivable, and inventory, while current liabilities encompass obligations the company needs to settle within a year, such as accounts payable and short-term debts.

By calculating net working capital, a company can determine whether it has sufficient assets to cover its short-term liabilities. A positive net working capital indicates that the company can easily meet its obligations, which is a sign of financial stability and operational efficiency. Conversely, a negative net working capital could signal potential liquidity issues, as it suggests that a company may struggle to pay its short-term debts when they come due.

The other options provide different financial concepts that do not directly relate to the definition of net working capital.