What does Working Capital measure?

Working Capital measures the difference between current assets and current liabilities. This metric is crucial for assessing a company's short-term financial health and operational efficiency. When current assets exceed current liabilities, it indicates that the company has sufficient resources to cover its short-term obligations, which is vital for maintaining liquidity and ensuring that the business can operate effectively without experiencing cash flow issues.

This measurement focuses exclusively on current accounts, which include cash, accounts receivable, and inventories (for assets) and accounts payable or other short-term debts (for liabilities). By providing insight into a company's ability to meet its immediate financial commitments, Working Capital is a key determinant of operational success and overall financial stability.

The other choices either calculate metrics that do not reflect the same financial aspect or include components unrelated to current financial obligations. Total assets minus total liabilities evaluates the overall net worth, while total equity divided by total assets gives a ratio that doesn't specifically address liquidity or immediate financial health. Current liabilities minus current assets would yield a negative value if current assets are greater, which does not provide useful information about financial stability.