Which of the following is one measure of liquidity?

• A. Gross Profit Margin
• B. Debt-to-Equity Ratio
• C. Net Sales
• D. Current Ratio

Answer: (D)

Verified step by step guidance

1. Understand the concept of liquidity: Liquidity refers to a company's ability to meet its short-term obligations using its current assets. Measures of liquidity help assess whether a company can pay off its debts as they come due.
2. Review the definition of the Current Ratio: The Current Ratio is a widely used measure of liquidity. It is calculated as the ratio of current assets to current liabilities, expressed as: $\frac{\mathrm{Current Assets}}{\mathrm{Current Liabilities}}$. This ratio indicates how many times a company’s current assets can cover its current liabilities.
3. Compare the given options: Gross Profit Margin measures profitability, Debt-to-Equity Ratio assesses financial leverage, and Net Sales is a measure of revenue. None of these directly measure liquidity. The Current Ratio, however, is specifically designed to evaluate liquidity.
4. Understand why the Current Ratio is the correct answer: A higher Current Ratio indicates better liquidity, as it shows the company has more current assets relative to its current liabilities. This makes it a reliable measure of liquidity.
5. Conclude the reasoning: Based on the definitions and purposes of the given options, the Current Ratio is the correct measure of liquidity because it directly evaluates the company’s ability to meet short-term obligations.