What financial measure indicates the liquidity of a business?

What financial measure indicates the liquidity of a business?

• A. Net profit margin
• B. Current ratio
• C. Return on equity
• D. Debt to equity ratio

Answer: (B)

The current ratio is a key measure of a company's liquidity, reflecting its ability to meet short-term obligations. This ratio is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a business has more short-term assets available to cover its short-term debts, suggesting a healthy liquidity position. In the context of financial management, liquidity is crucial because it determines whether a business can continue to operate effectively in the short term. It helps assess not only the immediate stability of the business but also provides insight into its operational efficiency and management of cash flow. Other financial measures, such as net profit margin, return on equity, and debt to equity ratio, focus on different aspects of a company's financial health. The net profit margin assesses profitability relative to revenue, return on equity evaluates how effectively management is using shareholders' equity to generate profit, and debt to equity ratio compares a company's debt levels to its equity, providing insights into its financial leverage and long-term solvency rather than its short-term liquidity.

The current ratio is a key measure of a company's liquidity, reflecting its ability to meet short-term obligations. This ratio is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a business has more short-term assets available to cover its short-term debts, suggesting a healthy liquidity position.

In the context of financial management, liquidity is crucial because it determines whether a business can continue to operate effectively in the short term. It helps assess not only the immediate stability of the business but also provides insight into its operational efficiency and management of cash flow.

Other financial measures, such as net profit margin, return on equity, and debt to equity ratio, focus on different aspects of a company's financial health. The net profit margin assesses profitability relative to revenue, return on equity evaluates how effectively management is using shareholders' equity to generate profit, and debt to equity ratio compares a company's debt levels to its equity, providing insights into its financial leverage and long-term solvency rather than its short-term liquidity.