What does "working capital" represent?

Working capital is a crucial financial metric that indicates the short-term financial health of a company. It represents the difference between current assets and current liabilities. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used up within a year. Current liabilities, on the other hand, consist of obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debt.

By calculating working capital, businesses can assess their ability to cover short-term liabilities with their short-term assets. A positive working capital indicates that a company has sufficient assets to pay off its short-term liabilities, which is essential for maintaining day-to-day operations and ensuring liquidity. Conversely, negative working capital suggests potential liquidity problems, which could jeopardize a company’s ability to sustain its operations effectively.

Understanding working capital is vital for stakeholders as it provides insights into the operational efficiency and financial stability of a business. This makes the second choice the correct answer in this context.