Which financial metric is used to assess the liquidity of a company?

The current ratio is a financial metric specifically designed to evaluate a company's liquidity, which refers to its ability to meet short-term obligations. This ratio is calculated by dividing a company's current assets by its current liabilities.

A higher current ratio indicates that the company has a greater proportion of liquid assets available to cover its short-term liabilities, which is a positive sign of financial health. Liquidity is crucial for businesses because it allows them to pay off debts and fund operations without needing to secure additional financing.

In contrast, other metrics such as debt to equity ratio, net profit margin, and return on equity serve different purposes. The debt to equity ratio measures financial leverage and a company's long-term solvency risk. Net profit margin assesses how efficiently a company converts revenue into profit, reflecting its operational efficiency rather than liquidity. Return on equity evaluates how effectively management is using shareholders' equity to generate profit, which is more related to profitability than to liquidity management. Understanding these distinctions is key in financial analysis and decision-making.