What ratio measures a company's short-term liquidity?

The current ratio is the correct measure of a company's short-term liquidity. This ratio is calculated by dividing current assets by current liabilities. It provides insight into a company's ability to meet its short-term obligations with its short-term assets. A current ratio greater than 1 typically indicates that a company has more current assets than current liabilities, which is a positive sign for liquidity. This ratio is crucial for small businesses as it helps assess whether they can cover their short-term financial commitments without turning to long-term financing options or falling into liquidity issues.

Other ratios listed serve different purposes; for example, the quick ratio also measures liquidity but does so by excluding inventory from current assets, providing a more conservative view. The debt-to-equity ratio assesses financial leverage by comparing total liabilities to shareholders' equity, while the return on assets evaluates a company's efficiency in using its assets to generate profits. Each of these ratios contributes to a broader financial analysis but does not specifically target short-term liquidity like the current ratio does.