what category of ratios measures a firm’s ability to meet its short-term obligations?
What category of ratios measures a firm’s ability to meet its short-term obligations?
Answer:
The category of ratios that measures a firm’s ability to meet its short-term obligations is known as “Liquidity Ratios.” Liquidity ratios help assess a company’s ability to pay off its short-term debts as they come due. Some common liquidity ratios include the Current Ratio, Quick Ratio (Acid-Test Ratio), and Cash Ratio. The Current Ratio is calculated by dividing current assets by current liabilities, providing an indication of a company’s ability to cover its short-term liabilities with its short-term assets. The Quick Ratio, on the other hand, is a more stringent measure of liquidity as it excludes inventory from current assets. Finally, the Cash Ratio is the most conservative liquidity ratio as it only considers the most liquid assets such as cash and cash equivalents when measuring the ability to cover short-term liabilities. These ratios are crucial for investors and creditors to evaluate a company’s short-term financial health and ability to meet its obligations promptly.