Which of the following is a common liquidity ratio?

The current ratio is indeed a common liquidity ratio, designed to measure a company's ability to meet its short-term obligations with its short-term assets. This ratio is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company has a greater ability to cover its short-term debts, signifying good financial health in terms of liquidity.

Liquidity ratios are critical because they provide insights into a company's operational efficiency and its short-term financial stability. By focusing on the relationship between current assets and current liabilities, stakeholders can evaluate how well a business can manage its cash flow and support its operational needs.

In contrast, the debt-to-equity ratio assesses a company's financial leverage by comparing its total liabilities to its shareholders' equity, which does not specifically address liquidity. The gross margin ratio measures the difference between revenue and cost of goods sold relative to revenue, providing insights into profitability rather than liquidity. Return on equity evaluates the profitability of a company in relation to shareholders' equity, focusing on overall performance rather than short-term financial health. Thus, while all these ratios are valuable in assessing different aspects of financial performance, the current ratio is distinctive in addressing a firm's liquidity position.