Ace the AFP Exam 2026 – Boost Your Financial Wizardry!

The current ratio is a key financial metric used to evaluate a company’s ability to meet its short-term liabilities with its short-term assets. It is calculated by dividing the current assets by the current liabilities. A ratio greater than one indicates that the company has more current assets than current liabilities, suggesting a better capacity to cover its short-term debts. This ratio is particularly important for assessing liquidity, which is the company's short-term financial health and its ability to quickly generate cash to settle obligations.

In contrast, the debt-to-equity ratio is more focused on the proportion of debt versus equity in a company's capital structure, measuring long-term solvency rather than short-term liquidity. The gross profit margin reflects the efficiency of a company in managing its production costs relative to its revenue, providing insight into profitability but not liquidity. Return on assets assesses how effectively a company utilizes its assets to generate profit, which is more of an indicator of overall operational efficiency rather than short-term solvency. Thus, the current ratio is the most relevant measure for evaluating the ability to pay short-term liabilities.