How is working capital calculated?

Working capital is an important financial metric used to assess a company's operational efficiency and short-term financial health. It is calculated as the difference between current assets and current liabilities. Current assets include cash, inventory, and accounts receivable—assets that are expected to be converted into cash or used up within a year. Current liabilities consist of obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debt.

By subtracting current liabilities from current assets, you derive the net amount available to cover short-term obligations, which reflects the liquidity available to the business for day-to-day operations. A positive working capital indicates that a company can pay off its short-term liabilities with its short-term assets, whereas a negative working capital may signal potential liquidity issues.

The other choices do not accurately reflect the definition of working capital. For instance, adding current liabilities to current assets or considering total debts and equities would not yield a meaningful measure of immediate financial health regarding a company's operations. Therefore, the subtraction of current liabilities from current assets is the correct approach for calculating working capital.