What aspect does working capital indicate about a firm?

Working capital measures a firm's operational liquidity by assessing its ability to cover short-term liabilities with its short-term assets. It is calculated as current assets minus current liabilities, providing a clear picture of a company's financial health in the near term. This indicator is crucial because it reflects how well a company can manage its day-to-day operations and meet its obligations without needing to secure additional financing.

A positive working capital indicates that a company has sufficient assets to pay off its immediate debts, which is a sign of good financial management and stability. Conversely, a negative working capital can signal potential liquidity problems and may suggest that the company is struggling to maintain sufficient cash flow.

Understanding working capital is essential for creditors, investors, and management, as it highlights the firm's operational efficiency and ability to fund its short-term operational needs.