What is typically evaluated when assessing a company's liquidity?

What is typically evaluated when assessing a company's liquidity?

• A. Inventory turnover ratio
• B. Net income
• C. Current ratio
• D. Return on equity

Answer: (C)

When assessing a company's liquidity, the current ratio is a key metric evaluated to determine the business's ability to meet its short-term obligations with its short-term assets. The current ratio is calculated by dividing current assets by current liabilities, and it provides insight into the financial health of a company. A higher current ratio indicates that a company has more than enough assets to cover its liabilities, suggesting good liquidity. While inventory turnover ratio is significant for understanding how efficiently a company manages its inventory, it does not directly measure liquidity. Net income is a measure of profitability, and return on equity gauges how effectively a company uses shareholder equity to generate profits, but neither specifically relates to the company's capacity to cover short-term debts. In contrast, the current ratio directly addresses liquidity, making it the most appropriate measure in this context.

When assessing a company's liquidity, the current ratio is a key metric evaluated to determine the business's ability to meet its short-term obligations with its short-term assets. The current ratio is calculated by dividing current assets by current liabilities, and it provides insight into the financial health of a company. A higher current ratio indicates that a company has more than enough assets to cover its liabilities, suggesting good liquidity.

While inventory turnover ratio is significant for understanding how efficiently a company manages its inventory, it does not directly measure liquidity. Net income is a measure of profitability, and return on equity gauges how effectively a company uses shareholder equity to generate profits, but neither specifically relates to the company's capacity to cover short-term debts. In contrast, the current ratio directly addresses liquidity, making it the most appropriate measure in this context.