Which ratio would a company most likely use to measure its ability to meet short-term obligations? A.
Question:
Which ratio would a company most likely use to measure its ability to meet short-term obligations?
A. Current ratio.
B. Payables turnover.
C. Gross profit margin.
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
The correct answer is A Current ratio The current ratio is a liquidity ratio that measures a companys ability to cover its shortterm obligations with its shortterm assets Its calculated as the companys current assets such as cash marketable securities accounts receivable and inventories divided by its current liabilities like shortterm debt and accounts payable The formula is as follows Current Ratio Current Assets Current Liabilities The main reason the current ratio is used is to provide an indication of the companys liquidity and overall shortterm financial health A current ratio greater than 1 indicates that the company has more current assets than current liabilities which suggests it should be able to meet its shortterm obligations In contrast the payables turnover ratio option B is an efficiencyshortterm liquidity metric that measures how quickly a company ...View the full answer
Answered By
Raunak Agarwal
Teaching is my hobby and now my profession. I teach students of CA and CFA(USA) in batches of 100 students and have a 5 year experience.
1+ Reviews
10+ Question Solved
Related Book For 
International Financial Statement Analysis CFA Institute Investment Series
ISBN: 9780470287668
1st Edition
Authors: Thomas R. Robinson, Hennie Van Greuning CFA, Elaine Henry, Michael A. Broihahn, Sir David Tweedie
Question Posted:
