What do liquidity ratios measure?

Liquidity ratios specifically measure a company's ability to meet its short-term obligations and pay maturing debts. These ratios evaluate the financial health of an organization by analyzing its current assets relative to its current liabilities. They are essential for assessing whether a company has enough liquid assets available to cover its immediate financial obligations, such as accounts payable or short-term loans, without needing to sell long-term assets.

The primary liquidity ratios, such as the current ratio and quick ratio, help investors, creditors, and analysts understand a company’s short-term financial position. A higher liquidity ratio indicates a stronger ability to pay off these maturing obligations, suggesting that the company is in a healthy position to manage upcoming payments.

While options discussing long-term profitability, inventory management, and return on equity are important financial metrics, they do not pertain to the company’s capability to promptly settle its short-term debts, which is the central focus of liquidity ratios. Therefore, the correct choice highlights the critical aspect of financial management that liquidity ratios are designed to assess.