Which metric would you use to assess the ability to meet short-term obligations with current assets?

Which metric would you use to assess the ability to meet short-term obligations with current assets?

• A. Current Ratio
• B. Debt to Asset Ratio
• C. Net Worth
• D. Solvency

Answer: (A)

Liquidity is about whether a business can cover upcoming bills using assets that can be turned into cash soon. The current ratio does this by comparing what’s on hand in the short term to what must be paid in the short term: current assets divided by current liabilities. A ratio greater than 1 means there are enough short-term assets to cover short-term obligations, with higher values signaling stronger liquidity. This target measure focuses specifically on short-term obligations, while the debt-to-asset ratio looks at long-term leverage, net worth reflects owner equity, and solvency refers to overall ability to meet debts over the long term.

Liquidity is about whether a business can cover upcoming bills using assets that can be turned into cash soon. The current ratio does this by comparing what’s on hand in the short term to what must be paid in the short term: current assets divided by current liabilities. A ratio greater than 1 means there are enough short-term assets to cover short-term obligations, with higher values signaling stronger liquidity. This target measure focuses specifically on short-term obligations, while the debt-to-asset ratio looks at long-term leverage, net worth reflects owner equity, and solvency refers to overall ability to meet debts over the long term.