What does working capital indicate about a company?

Working capital measures the difference between a company's current assets and current liabilities, providing insight into its short-term financial health. A positive working capital indicates that a company can cover its short-term obligations with its short-term assets, which is crucial for daily operations and business continuity. This metric helps stakeholders assess whether the company has sufficient liquidity to meet upcoming expenses and make necessary investments.

In contrast, options related to long-term profitability, market value, or annual cash flow do not align with what working capital reflects. Long-term profitability involves evaluating the overall financial performance of a company over an extended duration, which working capital does not specifically address. Market value pertains to the company’s valuation in the stock market rather than its operational liquidity. Similarly, cash flow over the year incorporates a broader analysis of income and expenditures rather than the immediate financial health depicted by working capital. Thus, it is clear that working capital specifically highlights a company's readiness to meet its short-term liabilities.