How is 'working capital' defined?

Working capital is defined as the difference between current assets and current liabilities. This financial metric is critical for assessing a company's short-term liquidity and operational efficiency. Current assets include cash, accounts receivable, and inventory, while current liabilities encompass obligations such as accounts payable and short-term debt.

A positive working capital indicates that a company has sufficient short-term assets to cover its short-term liabilities, which is vital for maintaining operations without financial strain. Conversely, negative working capital could signify potential liquidity issues, suggesting that the company might struggle to meet its financial obligations in the near term.

The other definitions listed do not accurately capture the essence of working capital. For instance, total assets refer to everything owned by the company, while total outstanding debts involve long-term obligations, and total equity reflects the ownership value in the business. These measures do not focus specifically on the short-term financial health indicated by the calculation of working capital.