What is the financial metric that compares current assets to current liabilities?

What is the financial metric that compares current assets to current liabilities?

• A. Current ratio
• B. Working capital ratio
• C. Asset turnover ratio
• D. Debt service coverage ratio

Answer: (A)

Measuring liquidity by comparing assets that can be turned into cash within a year to obligations due within the same period. The current ratio does this by dividing current assets by current liabilities, so it shows how many dollars of current assets you have to cover each dollar of current liabilities. If you have more current assets than current liabilities, the ratio is above 1, indicating you can meet short-term obligations. For example, $200,000 in current assets and $100,000 in current liabilities gives a current ratio of 2.0, meaning you have twice as many current assets as needed to cover those liabilities. Values near 1 suggest tighter liquidity, and very high values may mean some assets aren’t being used efficiently. Working capital is simply the difference between current assets and current liabilities, not a ratio, so it doesn’t express liquidity relative to the size of obligations. Asset turnover looks at how effectively you use assets to generate sales, not your ability to pay short-term debts. Debt service coverage focuses on cash flow available to meet debt payments, which is broader than the simple assets-to-liabilities comparison.

Measuring liquidity by comparing assets that can be turned into cash within a year to obligations due within the same period. The current ratio does this by dividing current assets by current liabilities, so it shows how many dollars of current assets you have to cover each dollar of current liabilities.

If you have more current assets than current liabilities, the ratio is above 1, indicating you can meet short-term obligations. For example, $200,000 in current assets and $100,000 in current liabilities gives a current ratio of 2.0, meaning you have twice as many current assets as needed to cover those liabilities. Values near 1 suggest tighter liquidity, and very high values may mean some assets aren’t being used efficiently.

Working capital is simply the difference between current assets and current liabilities, not a ratio, so it doesn’t express liquidity relative to the size of obligations. Asset turnover looks at how effectively you use assets to generate sales, not your ability to pay short-term debts. Debt service coverage focuses on cash flow available to meet debt payments, which is broader than the simple assets-to-liabilities comparison.