Which ratio indicates a company’s ability to cover its short-term obligations?

The liquidity ratio is essential for assessing a company's financial health, specifically its ability to meet short-term obligations. This ratio evaluates the availability of liquid assets to cover current liabilities, thus providing insight into a company's short-term financial stability. A higher liquidity ratio signals that a company has sufficient assets that can quickly be converted into cash to settle its debts, minimizing the risk of default.

Liquidity ratios include several specific ratios, such as the current ratio and quick ratio, which focus on the relationship between current assets and current liabilities. This measurement is critical for investors, creditors, and company management as it indicates how well the company can navigate short-term financial challenges.

In contrast, other ratios mentioned serve different purposes; for example, the asset ratio relates to overall asset management, the efficiency ratio measures how well a company utilizes its assets for revenue generation, and the leverage ratio assesses the extent of a company’s debt compared to its equity. These ratios do not specifically address the ability to cover short-term obligations, which is the focus of liquidity ratios.