Which measure compares current assets to current liabilities?

Which measure compares current assets to current liabilities?

• A. Working Capital Ratio
• B. Net Profit Margin
• C. Quick Ratio
• D. Debt to Equity

Answer: (A)

The key idea is liquidity: how well a company can cover its short-term obligations with assets that are expected to be converted to cash soon. The measure that directly compares current assets to current liabilities is the working capital ratio, which is calculated as current assets divided by current liabilities. This ratio shows how many dollars of assets exist for every dollar of short-term debt, giving a quick sense of the company’s ability to meet near-term obligations. For example, a ratio of 2 means there are two dollars in current assets for every one dollar of current liabilities, indicating strong short-term liquidity. Note how this differs from the other options: the quick ratio also compares current assets to current liabilities but excludes inventory to focus on the most liquid assets; net profit margin relates to profitability, not liquidity; and debt to equity assesses leverage rather than short-term liquidity.

The key idea is liquidity: how well a company can cover its short-term obligations with assets that are expected to be converted to cash soon. The measure that directly compares current assets to current liabilities is the working capital ratio, which is calculated as current assets divided by current liabilities. This ratio shows how many dollars of assets exist for every dollar of short-term debt, giving a quick sense of the company’s ability to meet near-term obligations. For example, a ratio of 2 means there are two dollars in current assets for every one dollar of current liabilities, indicating strong short-term liquidity.

Note how this differs from the other options: the quick ratio also compares current assets to current liabilities but excludes inventory to focus on the most liquid assets; net profit margin relates to profitability, not liquidity; and debt to equity assesses leverage rather than short-term liquidity.