Which ratio measures a company's ability to pay short-term obligations within one year?

• A. Acid test ratio
• B. Solvency / Stability
• C. Debt to total assets ratio
• D. Current ratio

Answer: (D)

This question tests liquidity—the ability to meet short-term obligations that are due within a year. The current ratio does exactly that by comparing current assets to current liabilities: current assets divided by current liabilities. It shows whether the company has enough near-term resources to cover its obligations, including cash, receivables, and inventories.

The other measures focus on different aspects. The acid-test (quick) ratio is a stricter liquidity test that excludes inventory, assessing how well obligations could be paid without selling inventory. Solvency or stability relates to long-term financial health rather than the near term. The debt-to-total-assets ratio looks at leverage and long-run risk, not the ability to pay current liabilities.

So, the current ratio is the most direct measure of the ability to pay short-term obligations within one year.