Net working capital is a measure of a firm’s

Net working capital is a measure of a firm’s

• A. Profitability
• B. Liquidity
• C. Solvency
• D. Asset Efficiency

Answer: (B)

Net working capital measures a firm’s ability to meet its short-term obligations with its short-term assets. It is current assets minus current liabilities, so a positive result shows a liquidity cushion to pay suppliers, employees, and other near-term needs. This concept is all about liquidity, the ease with which the company can cover short-term obligations. Profitability focuses on earnings and returns, not the immediate ability to cover debts. Solvency looks at long-term debt-paying ability and overall financial structure, not day-to-day liquidity. Asset efficiency concerns how well assets generate sales, rather than the firm’s short-term financial cushion. So net working capital is a measure of liquidity.

Net working capital measures a firm’s ability to meet its short-term obligations with its short-term assets. It is current assets minus current liabilities, so a positive result shows a liquidity cushion to pay suppliers, employees, and other near-term needs. This concept is all about liquidity, the ease with which the company can cover short-term obligations.

Profitability focuses on earnings and returns, not the immediate ability to cover debts. Solvency looks at long-term debt-paying ability and overall financial structure, not day-to-day liquidity. Asset efficiency concerns how well assets generate sales, rather than the firm’s short-term financial cushion.

So net working capital is a measure of liquidity.