Certified Supply Chain Professional (CSCP) Practice Exam

Which type of ratio is primarily used to measure a company's capacity to meet its short-term obligations?

1. Profitability ratio

2. Leverage ratio

3. Liquidity ratio

4. Collinearity ratio

The correct answer is: Liquidity ratio

The liquidity ratio is primarily used to measure a company's capacity to meet its short-term obligations. This ratio assesses the ability of a business to cover its current liabilities with its current assets. Key liquidity ratios, such as the current ratio and quick ratio, provide insights into the company's financial health in terms of short-term financial stability. By focusing on current assets—such as cash, accounts receivable, and inventories—compared to current liabilities, liquidity ratios offer valuable information on whether a company has enough resources readily available to fulfill its short-term commitments. This is critical for businesses to maintain operations, ensure supplier payments, and handle unforeseen expenses. Other types of ratios, like profitability ratios, evaluate a company's ability to generate profits and do not directly address short-term obligations. Similarly, leverage ratios assess a company's debt levels relative to its equity, which relates more to long-term financial health rather than immediate liquidity. Collinearity ratios, which are not standard financial ratios, do not apply in this context related to a company's obligations.