Definition of 'Working Capital'
Working capital is often used as a measure of a company’s short term health. It is calculated as the difference between current assets and current liabilities and represents the amount of immediately available capital to invest in operations.
TheStreet Explains ‘Working Capital’
Current assets usually include cash, accounts, receivable, inventory, marketable securities, prepaid expenses and any other assets that could be turn into cash within a year. Property and machinery and other hard assets are not included as they are not usually sold in normal business transactions and are usually only disposed of if the company is sold or liquidated.
Current liabilities are debts and obligations due within a year. They include short-term debt, accounts payable and accrued liabilities.
Working capital is often expressed as a ratio by dividing current assets by current liabilities. This is called the current ratio. When the ratio is more than 1, investors know that the company has enough assets to pay for its liabilities due within a year. This indications it is financially healthy. If it is too much above 1, however, it could mean that management isn’t investing its excess assets wisely – it is letting cash sit idle on the balance sheet.
Terms Related to 'Working Capital':
Return on assets, or ROA, is one of several ratios used to measu...
Return on investment, or ROI, measures how profitable an investm...
Articles Related to 'Working Capital':
By James "Rev Shark" DePorre | 04/13/16 - 10:34 AM EDT
By The Associated Press | 04/02/09 - 06:17 PM EDT