What does the current ratio measure?

The current ratio specifically measures a company's ability to cover its short-term obligations using its short-term assets. It is calculated by dividing current assets, such as cash, accounts receivable, and inventory, by current liabilities, which include accounts payable and other debts due within one year. A higher current ratio indicates better liquidity and a stronger position to pay off short-term creditors, while a lower ratio may signal potential liquidity issues.

The other options, while related to financial health and performance, do not accurately describe the current ratio. The relationship between total assets and total liabilities relates to overall leverage rather than short-term financial stability, the debt-to-equity ratio focuses on long-term financial structure, and profitability margins assess operational efficiency rather than liquidity. Thus, the correct understanding of the current ratio centers on the comparison of current assets to current liabilities.