Working Capital

Working capital is current assets minus current liabilities — the cushion between what a company can turn into cash within a year and what it owes within a year. Positive working capital means near-term obligations are covered; negative means the company depends on incoming cash arriving on schedule.

The same numbers expressed as a ratio give the current ratio (current assets / current liabilities), where readings below 1.0 flag potential liquidity strain. But negative working capital is not always distress: retailers and subscription businesses that collect from customers before paying suppliers run negative working capital on purpose, using their vendors' money as free financing.

Working capital swings also explain the gap between profits and cash. A growing company must fund more inventory and receivables every quarter, which is why fast growth can consume cash even while the income statement shows healthy earnings.