Net working capital helps determine what?

Net working capital, which is calculated as current assets minus current liabilities, primarily serves to assess an organization's short-term financial health and its ability to meet its current obligations. By focusing on current assets like cash, accounts receivable, and inventory, against current liabilities such as accounts payable and other short-term debts, net working capital gives insight into whether a company has enough assets to cover immediate liabilities. A positive net working capital indicates that a firm can comfortably meet its short-term debts, while a negative figure may raise concerns about liquidity and financial stability.

This metric is less directly related to future profitability, long-term growth potential, or asset depreciation. For instance, while future profitability might be inferred from the ability to maintain sufficient working capital, it is not solely determined by it, nor does it account for long-term growth or the effects of asset depreciation.