What does 'working capital' indicate?

Working capital refers to the difference between a company's current assets and its current liabilities. It is a key indicator of a company's operational efficiency and short-term financial health. By assessing working capital, stakeholders can understand if a company has enough assets to cover its short-term obligations, such as accounts payable and other immediate liabilities.

When working capital is positive, it indicates that the company can easily fund its day-to-day operations and can meet its short-term liabilities without financial strain. Conversely, a negative working capital situation suggests that a company may struggle to meet its short-term debts, raising concerns about its liquidity and operational stability.

This metric does not gauge long-term financial stability, total equity, or the liquidity of fixed assets, which are more complex assessments of a company's overall financial condition. Therefore, the correct interpretation of what working capital indicates is indeed a measure of a company's short-term financial health.