Which ratio is used to measure the ability to meet short-term obligations?

The ability to meet short-term obligations is commonly assessed using liquidity ratios, with the acid-test (quick) ratio being one of the most critical. This ratio specifically measures a company's capability to pay off its current liabilities without relying on the sale of inventory, which is typically considered less liquid. It focuses on the most liquid assets, namely cash, cash equivalents, and receivables, providing a stringent measure of short-term financial health.

Using the acid-test ratio is useful for creditors and financial analysts, as it gives a clearer picture of an entity's liquidity position than other measures that might include inventory. This ratio indicates that if a company were to face immediate financial obligations, it could cover them using its most accessible assets.

Other ratios, such as the current ratio, while also measuring liquidity, include inventory in their calculations, which may not always be easily converted to cash. The debt ratio measures the proportion of a company’s assets that are financed by debt rather than its ability to fulfill short-term obligations. Profitability ratios assess a company's ability to generate profit relative to its revenue, assets, or equity, rather than its liquidity position. Thus, the acid-test (quick) ratio is the most precise measure for evaluating a company's ability to meet short-term liabilities without