View Policies Current Attempt in Progress + Current assets minus current liabilities is a measure of a company’s
A working capital.
B profitability.
C solvency.
D free cash flow.
The correct answer and explanation is:
The correct answer is A. working capital.
Working capital is a financial metric used to assess a company’s operational efficiency and short-term financial health. It is calculated by subtracting current liabilities from current assets. Current assets include cash, accounts receivable, and inventory, while current liabilities include obligations that are due within one year, such as accounts payable and short-term debt.
Working capital is important because it shows the difference between the resources a company has available to cover its short-term obligations and the amount of debt it needs to repay. A positive working capital indicates that the company has enough assets to cover its short-term liabilities, which means it can continue its day-to-day operations without facing liquidity problems. A negative working capital suggests that the company may struggle to meet its short-term financial obligations, which can lead to financial difficulties or insolvency if not addressed.
Unlike profitability, which reflects a company’s ability to generate earnings over time, or solvency, which concerns a company’s ability to meet its long-term obligations, working capital is focused on a company’s short-term financial position. While free cash flow refers to the cash a company generates after accounting for capital expenditures, working capital does not directly measure cash flow but rather the difference between assets and liabilities that can be quickly converted into cash to support operations.
By monitoring working capital, companies can manage their liquidity, ensuring they have enough resources to cover operational expenses and avoid running into cash flow issues that could disrupt business continuity. In summary, working capital is a measure of short-term financial health, providing insight into the company’s capacity to pay off its immediate debts.