What does positive working capital indicate?

What does positive working capital indicate?

• A. The company has no current liabilities.
• B. The company can pay off short-term liabilities with short-term assets.
• C. The company has negative cash flow.
• D. The company has very high debt.

Answer: (B)

Positive working capital signals liquidity: current assets are greater than current liabilities, so the company has enough short-term resources to pay its near-term obligations as they come due. That’s exactly what “the company can pay off short-term liabilities with short-term assets” means, using assets like cash, receivables, and inventory that are expected to be converted to cash within a year. It doesn't require having no current liabilities, and it doesn't tell you anything directly about cash flow direction or how much debt the company holds—the balance between current assets and current liabilities is the focus here. In short, positive working capital indicates a cushion to meet short-term obligations.

Positive working capital signals liquidity: current assets are greater than current liabilities, so the company has enough short-term resources to pay its near-term obligations as they come due. That’s exactly what “the company can pay off short-term liabilities with short-term assets” means, using assets like cash, receivables, and inventory that are expected to be converted to cash within a year. It doesn't require having no current liabilities, and it doesn't tell you anything directly about cash flow direction or how much debt the company holds—the balance between current assets and current liabilities is the focus here. In short, positive working capital indicates a cushion to meet short-term obligations.