Financial statements · updated October 21, 2026
What is working capital and how is it calculated
Working capital is the difference between a company's short-term assets (cash, money owed by customers, inventory) and the bills it has to pay within a year. It shows whether the company has enough cash and fast-moving assets to pay suppliers, wages and loan instalments without borrowing.
Working capital formula
- Current assets
- Cash, money owed by customers, inventory: anything that turns into cash within a year.
- Current liabilities
- Suppliers, wages, taxes and loan instalments due within a year.
Worked example
A company has $3 billion in current assets and $2 billion in current liabilities.
The company has a billion more than it has to pay over the next year. The ratio between the two, 1.5, is the current ratio.
How to read working capital
How it changes matters too: if inventory and receivables grow faster than sales, the company ties up more and more cash in the business, and cash falls even while profit rises.
When working capital can fool you
Negative is not always bad: supermarkets and restaurants get paid by customers on the spot and pay suppliers after 30-60 days, so negative working capital is natural for them. Hard-to-sell inventory: counts as a current asset, but may be worth less. Unpaid receivables: customers who do not pay inflate working capital on paper.
Related terms
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Questions about working capital
Why does working capital grow when the company grows?
Because it sells more on credit and holds more inventory. That money is tied up until customers pay, which is why a fast-growing company may need loans.
Where does working capital come into the Altman Z-score?
It is the first item: working capital divided by total assets. Low or negative working capital pulls the score down.
These explanations are for information only. They are not a recommendation to buy or sell.
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