What does the liquidity ratio measure?

The liquidity ratio measures a company's ability to meet its short-term liabilities using its most liquid assets. This ratio is crucial for assessing financial health, as it indicates whether a company can cover its current debts with its available resources. A high liquidity ratio means that a company has a sufficient amount of cash and other assets that can be quickly converted into cash to satisfy its immediate obligations.

In the context of the choices provided, this focus on short-term financial stability aligns directly with the ability to pay current debts, which is the essence of what the liquidity ratio represents. Understanding this ratio helps stakeholders evaluate whether a company can maintain its operations, particularly during financial stress, making it a key aspect of financial analysis for contractors and businesses alike.