What does the current ratio measure?

The current ratio specifically measures a company's ability to pay its short-term obligations. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates a stronger liquidity position, meaning the company is better equipped to fulfill its short-term financial commitments using its short-term assets. This measurement is critical for assessing financial health, particularly in industries where cash flow management is vital.

In comparison, other options do not address the current ratio's purpose. Long-term profitability pertains to metrics such as return on equity or profit margins, which evaluate a company's ability to generate profit over extended periods. The proportion of equity to debt reflects leverage and capital structure decisions but does not provide insights into short-term financial health. Efficiency of asset utilization deals with how well a company uses its assets to generate revenue, which is distinct from liquidity ratios focused on short-term obligations.