Which financial ratio measures a company’s ability to pay short-term liabilities?

The current ratio is a financial metric that assesses a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company has more short-term assets than short-term liabilities, suggesting a better capability to fulfill its obligations in the near term. This ratio is crucial for creditors and investors as it provides insights into the company’s liquidity position and operational efficiency in managing its short-term financial commitments.

In contrast, the debt-to-equity ratio evaluates a firm's financial leverage and capital structure, focusing on the proportion of debt used to finance assets relative to shareholders' equity, rather than short-term liquidity. Return on investment (ROI) measures the profitability of an investment relative to its cost and does not pertain specifically to liquidity or the ability to pay current liabilities. Gross profit margin reflects the efficiency of a company in producing goods or services, indicating the percentage of revenue that exceeds the cost of goods sold, but it also does not measure short-term liability management directly. Thus, the current ratio is distinctly suited for evaluating a company’s short-term financial health.