The current ratio and working capital are two important financial measures used to assess the financial health of a business. Simply put, the current ratio is the ratio of current assets to current liabilities while working capital is the difference between current assets and current liabilities.

The current ratio is used to measure a company’s short-term liquidity—essentially its ability to make short-term payments. A high current ratio (greater than 1) indicates the company is in a strong cash position because it has more current assets than current liabilities. A low current ratio (less than 1) suggests the company may have difficulty paying bills as they come due.

Working capital, on the other hand, is an indicator of a company’s overall financial health. When the working capital is positive, it means the company can meet its short-term obligations, while a negative working capital signals potential trouble ahead. In general, businesses should maintain at least a positive working capital, which is achieved when current assets exceed current liabilities.