In financial terms, what does working capital mainly consist of?

Working capital is a financial metric that represents the difference between a company's current assets and its current liabilities. This measurement is crucial because it reflects a company's short-term financial health and operational efficiency.

Current assets typically include cash, accounts receivable, inventory, and other assets expected to be converted into cash or used up within a year. On the other hand, current liabilities encompass obligations like accounts payable, short-term loans, and other debts that are due within the same timeframe.

By subtracting current liabilities from current assets, the working capital formula helps assess whether a company possesses sufficient short-term assets to cover its immediate liabilities. A positive working capital indicates that the company can easily meet its short-term obligations, which is indicative of a healthy financial position. Conversely, negative working capital may suggest liquidity problems, as the company might struggle to pay its obligations on time.

Therefore, the definition and calculation of working capital center directly around the relationship of current assets and current liabilities, making it a vital component of financial analysis for understanding a firm’s liquidity.