Which ratio is used to measure a company's liquidity?

The current ratio is used to measure a company's liquidity, which refers to its ability to meet short-term obligations with its current assets. This ratio is calculated by dividing the total current assets by the total current liabilities. A higher current ratio indicates a better capacity to cover short-term debts, signifying a more liquid position.

In the context of assessing liquidity, the current ratio is pivotal as it provides insight into whether a company has enough resources on hand to pay off its immediate liabilities. Companies with a current ratio of less than 1 may struggle to meet their obligations, whereas those with a ratio significantly above 1 are generally seen as financially stable in the short term.

The other ratios mentioned serve different purposes: the debt-to-equity ratio assesses leverage and financial risk, return on equity evaluates profitability relative to shareholder equity, and profit margin measures the percentage of revenue that remains after all expenses are deducted, focusing on profitability rather than liquidity.