Which metric indicates short-term liquidity and is calculated as current assets minus current liabilities?

Which metric indicates short-term liquidity and is calculated as current assets minus current liabilities?

• A. Current Ratio
• B. Debt Ratio
• C. Working Capital
• D. Net Profit on Sales Ratio

Answer: (C)

Short-term liquidity is about the cushion a business has to cover near-term bills. The metric that captures this as a dollar amount is working capital: current assets minus current liabilities. A positive result means there’s extra resources to handle day-to-day expenses, while a negative result signals a potential liquidity gap. For example, if current assets are 120,000 and current liabilities are 90,000, working capital is 30,000—the company could comfortably cover short-term obligations with 30k to spare. This differs from the current ratio, which is CA divided by CL and gives a ratio rather than an absolute dollar amount, and from the debt ratio, which focuses on leverage, and from net profit on sales, which focuses on profitability, not liquidity. Hence this metric is the best measure of short-term liquidity as described.

Short-term liquidity is about the cushion a business has to cover near-term bills. The metric that captures this as a dollar amount is working capital: current assets minus current liabilities. A positive result means there’s extra resources to handle day-to-day expenses, while a negative result signals a potential liquidity gap. For example, if current assets are 120,000 and current liabilities are 90,000, working capital is 30,000—the company could comfortably cover short-term obligations with 30k to spare. This differs from the current ratio, which is CA divided by CL and gives a ratio rather than an absolute dollar amount, and from the debt ratio, which focuses on leverage, and from net profit on sales, which focuses on profitability, not liquidity. Hence this metric is the best measure of short-term liquidity as described.