Which of the following ratios is primarily used to measure a company's liquidity?

• A. Debt-to-Equity Ratio
• B. Inventory Turnover Ratio
• C. Return on Equity (ROE)
• 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. Ratios measuring liquidity focus on the relationship between current assets and current liabilities.
2. Review the Current Ratio formula: The Current Ratio is calculated as \( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \). This ratio indicates how many times a company can cover its short-term liabilities with its short-term assets.
3. Compare the given ratios: Debt-to-Equity Ratio measures financial leverage, Inventory Turnover Ratio measures operational efficiency, and Return on Equity (ROE) measures profitability. None of these directly assess liquidity.
4. Identify the correct ratio: The Current Ratio is specifically designed to measure liquidity, as it focuses on the relationship between current assets and current liabilities.
5. Conclude that the Current Ratio is the correct answer because it directly evaluates a company's ability to meet short-term obligations, which is the essence of liquidity.