Which measure indicates a company's ability to pay its creditors?

Working capital is a crucial measure that indicates a company's ability to pay its short-term liabilities and, consequently, its creditors. It is calculated as current assets minus current liabilities. A positive working capital figure suggests that the company has sufficient short-term assets to cover its short-term obligations, reflecting a solid liquidity position. This measure is essential for stakeholders, including creditors, because it provides insight into how effectively the company can manage its cash flow and meet immediate financial commitments.

In contrast, gross profit primarily focuses on the profit a company makes after deducting the costs associated with producing its goods or services, which does not directly address the ability to pay creditors. Net income represents the company's total earnings after all expenses have been deducted, but it also does not specifically evaluate liquidity or short-term financial health. Shareholders' equity reflects the net worth of a company from an ownership perspective and is more about the capital invested in the company rather than its capability to meet immediate financial obligations. Thus, working capital is the most relevant measure for assessing a company's ability to pay its creditors.