Working capital (also called net working capital) is a company's current assets minus its current liabilities. Current assets are what the company expects to turn into cash within a year (cash, money owed by customers, inventory). Current liabilities are the bills and debts that fall due within the same year. The result is a money amount, not a ratio: it is the cushion left over if every short-term bill were paid from short-term assets. Positive working capital means the cushion exists. Negative working capital means the short-term bills are larger than the short-term assets. Dividing the same two figures instead of subtracting them gives the current ratio.
Worked example
Company A has $50,000 in cash, $80,000 owed by customers and $120,000 of inventory, so current assets are $250,000. It owes suppliers $90,000 and a lender $60,000 within the year, so current liabilities are $150,000. Working capital = $250,000 - $150,000 = $100,000. A supermarket can look very different: with $15,000 in cash and $25,000 of stock it has $40,000 of current assets, but it owes suppliers $70,000. Working capital = $40,000 - $70,000 = -$30,000. That is not automatically a problem, because shoppers pay at the till on the day, while the suppliers are paid weeks later.
Why it matters
Working capital shows how much room a company has to pay its short-term bills and keep running day to day, so it is a basic piece of financial strength. The figures come from the balance sheet in the annual report. The catch is that the amount alone says little: $100,000 is a large cushion for a corner shop and a rounding error for a big manufacturer, which is why investors often look at the current ratio too. A negative figure is also not always a warning. Supermarkets and some subscription businesses collect cash from customers before they pay suppliers, so they can run negative by design. A high figure can hide slow-selling stock or customers who pay late. A low or negative reading is a question to look into, not a verdict, so compare it with companies in the same industry and with the company's own past years.
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Frequently asked questions
Subtract current liabilities from current assets, both taken from the same balance sheet date. With $250,000 of current assets and $150,000 of current liabilities, working capital is $100,000.
Yes. It means the bills due within a year are larger than the assets that turn into cash within a year. For a supermarket this can be normal, because customers pay at once and suppliers are paid later. For a company with slow-paying customers it can be a reason to look closer.
Both use the same two balance sheet figures. Working capital subtracts them and gives a money amount. The current ratio divides them and gives a ratio, which is easier to compare between companies of different sizes.
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