The correct answer is: A. Liquidity ratio.
Liquidity ratios are a type of financial ratio that measures a company’s ability to meet its short-term obligations. They are calculated by dividing a company’s current assets by its current liabilities. The higher the liquidity ratio, the more liquid the company is, and the better able it is to meet its short-term obligations.
There are several different types of liquidity ratios, including the current ratio, the quick ratio, and the cash ratio. The current ratio is the most common liquidity ratio, and it is calculated by dividing a company’s current assets by its current liabilities. The quick ratio is similar to the current ratio, but it excludes inventory from current assets. The cash ratio is the most conservative liquidity ratio, and it is calculated by dividing a company’s cash and cash equivalents by its current liabilities.
Liquidity ratios are important because they can help investors and creditors assess a company’s ability to meet its short-term obligations. A company with a high liquidity ratio is generally considered to be a good investment or credit risk, while a company with a low liquidity ratio is generally considered to be a poor investment or credit risk.
Here is a brief explanation of each of the options:
- Leverage ratio measures the extent to which a company uses debt to finance its assets. A high leverage ratio indicates that a company is using a lot of debt, which can be risky if the company is unable to make its debt payments.
- Activity ratio measures how efficiently a company uses its assets. A high activity ratio indicates that a company is using its assets efficiently, which can lead to higher profits.
- Profitability ratio measures how profitable a company is. A high profitability ratio indicates that a company is generating a lot of profit from its sales.