How is net working capital (NWC) calculated?

Net working capital (NWC) is a measure of a company's short-term liquidity and operational efficiency. It is calculated as the difference between current assets and current liabilities. This calculation helps assess the company's ability to cover its short-term obligations with its short-term assets.

Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used within a year. Current liabilities comprise obligations that are due within the same timeframe, such as accounts payable and short-term debt. By subtracting current liabilities from current assets, net working capital reflects the amount of capital available to fund daily operations and manage short-term financial needs.

A positive NWC indicates that a company has enough short-term assets to cover its short-term liabilities, which is a sign of financial health. Conversely, a negative NWC suggests potential liquidity issues, meaning the company might struggle to meet its short-term obligations.