What is considered working capital?

Working capital is defined as the difference between a company's current assets and current liabilities. This measure is crucial for understanding a company's short-term financial health and its efficiency in managing its operational liquidity. Current assets include items such as cash, accounts receivable, and inventory, which are expected to be converted into cash or used within a year. Current liabilities, on the other hand, encompass obligations that are due within the same time frame, such as accounts payable and short-term debts.

By assessing working capital, stakeholders can determine if a company has enough short-term assets to cover its short-term liabilities, which is vital for maintaining day-to-day operations. A positive working capital indicates that a company can comfortably meet its short-term obligations, while a negative working capital might signal potential liquidity issues.

In contrast, other options do not accurately reflect the concept of working capital. The total revenue of the company refers to the income generated from sales without considering the timing of cash flows or liabilities. The sum of long-term assets pertains to investments a company holds for more than a year, which are not relevant for assessing current liquidity. Cumulative profits over time are important for overall profitability but do not speak directly to a company's current ability to manage short-term liabilities.