What is "working capital"?

Working capital is defined as the difference between a company's current assets and current liabilities. This measure is essential as it indicates the short-term liquidity available to a company, essentially reflecting its ability to cover its short-term obligations with its short-term assets.

Current assets typically include cash, accounts receivable, and inventory, which can be converted into cash within a year. Current liabilities, on the other hand, encompass obligations that a company must settle within the same time frame, 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 a sign of financial health and operational efficiency. Conversely, negative working capital may signal potential liquidity problems.

The other choices do not accurately represent working capital. For example, the first option refers to the overall profitability of the company, which does not focus specifically on liquidity. The third option about the amount of money a company can borrow pertains to financing, not operational liquidity, while the fourth option deals with the market value of a company’s equity, which is separate from the company's operational efficiency measured by working capital.