Which financial ratio helps measure a company's ability to meet short-term obligations?

Which financial ratio helps measure a company's ability to meet short-term obligations?

• A. A. Quick ratio
• B. B. Receivable turnover
• C. C. Profit margin
• D. D. Current ratio

Answer: (D)

The current ratio is a crucial financial metric that evaluates a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A ratio greater than 1 indicates that the company has more current assets than current liabilities, suggesting a favorable position to meet short-term obligations. This ratio is particularly important for creditors and investors as it provides insights into liquidity and financial health. In contrast, the quick ratio, although also a measure of liquidity, is more stringent since it excludes inventory from current assets, focusing only on cash, accounts receivable, and other liquid assets. While it provides a tighter view of liquidity, the current ratio is broader and commonly used for assessing overall short-term financial obligations. Receivable turnover measures how efficiently a company collects its accounts receivable, which does not directly reflect the ability to cover current liabilities. Profit margin assesses a company's profitability rather than its liquidity, making it an inappropriate choice for determining short-term obligation fulfillment.

The current ratio is a crucial financial metric that evaluates a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A ratio greater than 1 indicates that the company has more current assets than current liabilities, suggesting a favorable position to meet short-term obligations. This ratio is particularly important for creditors and investors as it provides insights into liquidity and financial health.

In contrast, the quick ratio, although also a measure of liquidity, is more stringent since it excludes inventory from current assets, focusing only on cash, accounts receivable, and other liquid assets. While it provides a tighter view of liquidity, the current ratio is broader and commonly used for assessing overall short-term financial obligations.

Receivable turnover measures how efficiently a company collects its accounts receivable, which does not directly reflect the ability to cover current liabilities. Profit margin assesses a company's profitability rather than its liquidity, making it an inappropriate choice for determining short-term obligation fulfillment.