What is net working capital?

Net working capital is defined as the difference between a company's current assets and its current liabilities. This metric is crucial for assessing a company's short-term financial health and its ability to meet its short-term obligations. Current assets include cash, accounts receivable, inventory, and other assets expected to be converted to cash or consumed within one year. Current liabilities encompass debts or obligations that are due within the same time frame, such as accounts payable and short-term loans.

By calculating net working capital, businesses can determine if they have enough assets to cover their liabilities. A positive net working capital indicates that a company can pay off its short-term debts, facilitating smooth operations and financial stability. Conversely, a negative value suggests potential liquidity issues that could hinder operational functionality.

The other options do not accurately describe net working capital—total revenue relates to the overall income generated by the company, total equity pertains to the owners' interest in the business after liabilities are deducted from assets, and the sum of all company debts represents long-term obligations rather than short-term financial positioning.