What does working capital indicate?

Working capital is an important financial metric that indicates a company's short-term liquidity. It is calculated by subtracting current liabilities from current assets, and it serves as a measure of how easily a business can meet its short-term financial obligations. Positive working capital suggests that a company can cover its short-term debts and invest in its operations, while negative working capital may indicate potential liquidity issues.

Short-term liquidity is critical for businesses as it reflects their ability to pay bills as they come due and to ensure smooth operations without running into financial distress. This focus on the immediate assets and liabilities helps stakeholders understand the financial health of the business over a shorter time horizon, which is essential for day-to-day operations.

Other choices focus on different aspects of a company's finances. Overall profitability relates to the long-term performance and viability of a business, while long-term assets pertain to capital investments. Forms of debt financing refer to the methods through which a company raises funds for both short-term and long-term needs, which is distinct from the measure of liquidity that working capital provides.