Which financial ratio is commonly used to measure liquidity?

Which financial ratio is commonly used to measure liquidity?

• A. Debt-To-Equity Ratio
• B. Current Ratio
• C. Net Margin
• D. Return On Investment

Answer: (B)

Liquidity is about how easily a business can cover its short-term bills with assets that can be turned into cash quickly. The current ratio does this best by comparing what you own in the near term to what you owe in the near term: current assets divided by current liabilities. A value above 1 means there’s a cushion to pay suppliers, payroll, and other upcoming expenses, which is especially important for a landscaping contractor juggling payroll and materials between projects. This measure is widely used because it’s straightforward to compute from financial statements and provides a clear snapshot of short-term financial health. Other options focus on profitability or financing structure rather than how quickly obligations can be met, so they don’t indicate liquidity as directly.

Liquidity is about how easily a business can cover its short-term bills with assets that can be turned into cash quickly. The current ratio does this best by comparing what you own in the near term to what you owe in the near term: current assets divided by current liabilities. A value above 1 means there’s a cushion to pay suppliers, payroll, and other upcoming expenses, which is especially important for a landscaping contractor juggling payroll and materials between projects. This measure is widely used because it’s straightforward to compute from financial statements and provides a clear snapshot of short-term financial health. Other options focus on profitability or financing structure rather than how quickly obligations can be met, so they don’t indicate liquidity as directly.