This financial ratio measures the business's liquidity:
A. profit margin.
B. average daily rate ratio.
C. current ratio.
D. days receivable ratio.
C.
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The financial ratio that measures a business's liquidity is the current ratio.
To calculate the current ratio, you need two pieces of information: the total current assets and the total current liabilities of the business.
Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within a year. Current liabilities, on the other hand, include accounts payable, short-term debt, and other obligations that are expected to be paid within a year.
To find the current ratio, divide the total current assets by the total current liabilities. The formula is:
Current Ratio = Total Current Assets / Total Current Liabilities
The result of the current ratio calculation will give you an indication of the business's ability to meet its short-term obligations. A ratio higher than 1 indicates that the business has more current assets than current liabilities, which suggests a higher level of liquidity. On the other hand, a ratio lower than 1 means that the business may struggle to meet its short-term obligations.
Therefore, the correct answer to the question is C. current ratio.