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Which of the following ratios best measures a company's ability to meet its short‑term obligations without raising new external capital?

easy MCQ 1 mark Class 12 · Accountancy · Analysis of Financial Statements
  1. Debt‑Equity Ratio
  2. Current Ratio
  3. Return on Capital Employed
  4. Gross Profit Ratio
Answer
Current Ratio

The correct answer is Current Ratio — Hence the ratio that directly measures ability to meet short‑term obligations is the Current Ratio.

Step-by-step solution

  1. Identify the purpose of each ratio listed.
  2. Current Ratio compares current assets with current liabilities and indicates short‑term solvency.
  3. Debt‑Equity Ratio measures long‑term financial leverage.
  4. Return on Capital Employed measures overall profitability.
  5. Gross Profit Ratio measures profit relative to sales.
  6. Hence the ratio that directly measures ability to meet short‑term obligations is the Current Ratio.
Common mistake: Confusing liquidity with solvency ratios

Concept tested: Liquidity ratio identification

Published · How this solution was prepared and checked

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