How is net working capital defined?

Net working capital is a financial metric that measures a company's short-term liquidity and operational efficiency. It is defined as non-cash current assets minus non-interest bearing current liabilities.

This definition captures the core purpose of net working capital: to assess the resources a company has readily available to cover its short-term obligations. By focusing on non-cash current assets, the measure excludes cash and equivalents since they can be used for various purposes, potentially inflating the metric unproductively. Non-interest bearing current liabilities are also considered as they do not incur interest costs, thereby helping to present a clearer picture of the company's ability to manage its operational financing without the burden of financing costs.

The correct definition reflects the essence of working capital as a measure of liquidity that is directly related to the day-to-day operations of the business. This understanding helps stakeholders evaluate how well a company can meet its short-term liabilities and invest in its growth opportunities.