Net working capital measures a firm’s ability to pay its way, or its liquidity. Subtract its current liabilities from its current assets. Current assets are those that can be turned into cash within a year: stocks of finished goods, money owed from customers, and cash. Current liabilities includes outstanding supplier invoices, tax or repayment of loans. If current assets are greater than current liabilities, the firm has positive net working capital. But this doesn’t mean it can always meet its liabilities when they fall due. If it can’t turn its assets into cash before it has to pay its bills, it may become insolvent. Also, supermarkets tend to have negative net working capital but can easily sell their stock before they have to pay their suppliers.
