Which is the best indicator of a business's ability to pay its current bills?

Which is the best indicator of a business's ability to pay its current bills?

• A. Net working capital
• B. Gross revenue
• C. Profit margin
• D. Current assets

Answer: (A)

Evaluating a business’s ability to pay its current bills comes down to liquidity—the cushion you have to cover short-term obligations. Net working capital does exactly that by comparing what the company owns in the near term (current assets) with what it owes soon (current liabilities). When this difference is positive, there’s a buffer to pay bills, buy supplies, and meet payroll as they come due. If it’s negative, meeting those immediate obligations becomes more challenging, signaling potential liquidity problems. Current assets alone don’t tell the whole story, because they don’t account for what’s owed in the near term. Gross revenue measures sales volume, not whether cash is available to cover debts. Profit margin reflects profitability after costs, not the timing or sufficiency of cash to pay bills. Net working capital integrates both sides of the short-term balance, giving the clearest snapshot of short-term financial health.

Evaluating a business’s ability to pay its current bills comes down to liquidity—the cushion you have to cover short-term obligations. Net working capital does exactly that by comparing what the company owns in the near term (current assets) with what it owes soon (current liabilities). When this difference is positive, there’s a buffer to pay bills, buy supplies, and meet payroll as they come due. If it’s negative, meeting those immediate obligations becomes more challenging, signaling potential liquidity problems.

Current assets alone don’t tell the whole story, because they don’t account for what’s owed in the near term. Gross revenue measures sales volume, not whether cash is available to cover debts. Profit margin reflects profitability after costs, not the timing or sufficiency of cash to pay bills. Net working capital integrates both sides of the short-term balance, giving the clearest snapshot of short-term financial health.