The current ratio is used to assess which aspect of a company?

The current ratio is used to assess which aspect of a company?

• A. Liquidity
• B. Profitability
• C. Solvency
• D. Asset turnover

Answer: (A)

Liquidity is the ability of a company to pay its short-term obligations as they come due. The current ratio measures this by comparing current assets to current liabilities. A ratio above 1 indicates the company has more short-term assets than short-term debts, suggesting it can cover obligations in the near term. If the ratio is below 1, there may be difficulty meeting those obligations without additional financing. This metric specifically targets near-term solvency, not profitability or long-term financial health. Profitability relates to earnings, solvency to long-term debt capacity, and asset turnover evaluates how efficiently assets generate sales. Keep in mind the current ratio doesn’t account for cash timing or the quality of current assets.

Liquidity is the ability of a company to pay its short-term obligations as they come due. The current ratio measures this by comparing current assets to current liabilities. A ratio above 1 indicates the company has more short-term assets than short-term debts, suggesting it can cover obligations in the near term. If the ratio is below 1, there may be difficulty meeting those obligations without additional financing. This metric specifically targets near-term solvency, not profitability or long-term financial health. Profitability relates to earnings, solvency to long-term debt capacity, and asset turnover evaluates how efficiently assets generate sales. Keep in mind the current ratio doesn’t account for cash timing or the quality of current assets.