Which ratio measures a company's ability to pay short-term obligations?

The current ratio is a key measure of a company's ability to pay its short-term obligations, which include liabilities due within one year. This ratio compares a company's current assets, such as cash, accounts receivable, and inventory, to its current liabilities, which are obligations that need to be settled within the short term. A higher current ratio indicates that a company has a greater ability to cover its short-term debts, reflecting liquidity and financial health.

In contrast, other ratios serve different purposes. The return on equity ratio measures profitability by showing how effectively management is using shareholders' equity to generate profit. The price-to-earnings ratio evaluates a company's share price relative to its earnings per share but doesn't provide insight into liquidity or short-term financial obligations. Lastly, the debt-to-equity ratio assesses a company's financial leverage by comparing its total liabilities to its shareholders' equity, which is more focused on long-term financial stability rather than immediate liquidity. Thus, the current ratio clearly stands out as the appropriate measure for evaluating a company's ability to meet its short-term obligations.