What does a positive working capital indicate?

A positive working capital indicates that a company's current assets exceed its current liabilities, which generally signals a good short-term financial health. Specifically, this situation provides the firm with a source of cash that can be utilized for operational needs and investments in growth opportunities. When a company has positive working capital, it implies that there are sufficient funds available to cover short-term obligations, which helps mitigate the risk of financial difficulties.

In this context, while a business may have cash reserves, positive working capital is not solely indicative of a surplus of cash reserves. It encompasses all current assets, which include inventory and receivables in addition to cash. Additionally, positive working capital does not guarantee a lack of financial obligations since liabilities are still present, nor does it ensure future profitability, as a company can have working capital yet still face challenges that impact earnings. Thus, identifying positive working capital as a source of cash highlights its role in supporting day-to-day operations and overall liquidity management.