What does the current ratio measure?

• A. Current assets to current liabilities
• B. Net income to total assets
• C. Long-term debt to equity
• D. Inventory to accounts payable

Answer: (A)

The current ratio measures liquidity by comparing what a company owns in the near term to what it owes in the near term. It is calculated by dividing current assets by current liabilities. When this ratio is greater than 1, the company has more short-term resources than short-term obligations, signaling better ability to cover debts as they come due. This ratio focuses on short-term financial health, not on profitability or long-term solvency. It’s not about profitability (net income to total assets), leverage (long-term debt to equity), or a narrow relation like inventory to accounts payable; those options point to other aspects of financial health. The current ratio specifically uses all current assets against all current liabilities to gauge near-term liquidity.