Net Working Capital (NWC) is a financial metric representing the difference between a company's Current Assets and its Current Liabilities. It gauges the company's operational liquidity and short-term financial health.
To calculate NWC, one subtracts Current Liabilities, such as accounts payable or accrued expenses, from Current Assets, including cash, accounts receivable, and inventory. For example, if a business has $200,000 in Current Assets and $150,000 in Current Liabilities, its NWC is $50,000.
NWC gives stakeholders an idea of how effectively a company can meet its short-term obligations using its short-term assets. Positive NWC implies the company can cover its short-term liabilities and reinvest in operations, while negative NWC warrants further scrutiny of the company's liquidity and operational efficiency. For example, a retail business with high inventory turnover might have a low NWC, but this could reflect industry norms rather than liquidity issues.