Which ratio is commonly used to measure short-term liquidity?

The current ratio is a key financial metric used to evaluate a company's short-term liquidity, which refers to its ability to meet its short-term obligations with its most liquid assets. The current ratio is calculated by dividing a company's current assets by its current liabilities. This ratio provides insight into whether a company has enough resources accessible within a year to pay off its short-term debts.

A current ratio greater than 1 indicates that the company has more current assets than current liabilities, which is a favorable sign of liquidity. It reflects the company's ability to cover its short-term financial commitments without relying on the sale of long-term assets or obtaining additional financing. Therefore, the current ratio serves as a fundamental indicator of financial health in the short term, especially in assessing operational efficiency and liquidity risk.

Other options, although relevant to different areas of financial analysis, do not focus specifically on short-term liquidity. For example, the quick ratio, while also a measure of liquidity, excludes inventory from current assets, making it a more conservative measure than the current ratio. The debt to equity ratio assesses a company's financial leverage and long-term solvency, while return on investment focuses on profitability and efficiency in using investments, neither of which directly addresses short-term liquidity concerns.