What does working capital reflect about a company?

Working capital is an essential financial metric that reflects a company's short-term liquidity and operational efficiency. It is calculated as the difference between current assets and current liabilities. Current assets are items that are expected to be converted into cash or used up within a year, such as cash, accounts receivable, and inventory. Current liabilities are obligations that a company must settle within the same time frame, such as accounts payable and short-term debts.

This measure indicates how well a company can meet its short-term obligations with its short-term assets. A positive working capital signifies that the company has sufficient assets to cover its liabilities, which is a positive indicator of its liquidity position. Conversely, negative working capital could signal financial difficulties and potential insolvency risks.

By focusing on the difference between current assets and current liabilities, working capital provides insight into a company's operational efficiency and short-term financial health, making it a critical component in assessing the company's ability to manage its day-to-day operations.