What does the current ratio measure?

The correct answer is that the current ratio measures a company’s ability to pay short-term obligations. This ratio is a liquidity benchmark that compares a company’s current assets to its current liabilities. Current assets are assets expected to be converted into cash or used up within one year, while current liabilities are obligations that need to be settled within the same timeframe.

A higher current ratio indicates that a company has sufficient assets to cover its short-term liabilities, thus demonstrating financial stability and readiness to meet immediate financial commitments. This ratio is essential for creditors and investors as it provides insights into the short-term financial health of the business.

Options related to long-term profitability, long-term debts, or total market value do not fit the purpose of the current ratio, as they pertain to different aspects of financial analysis. The current ratio is specifically focused on short-term financial obligations, making it a critical metric for assessing a company's immediate financial resilience.