What does the current ratio measure in financial terms?

The current ratio is a financial metric that assesses a company's ability to meet its short-term obligations with its short-term assets. This ratio is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a business has a strong liquidity position, suggesting it can cover its short-term debts more easily. Hence, the correct choice reflects the core purpose of the current ratio, which is to evaluate whether the organization has sufficient assets readily available to handle its immediate liabilities.

In contrast, options that refer to long-term financial stability or profit margins relate to different aspects of financial health. Long-term stability pertains to how well a company can maintain operations over an extended period, which involves various financial metrics beyond just current assets and liabilities. Profit margins are concerned with profitability and do not provide insights into liquidity or the ability to service short-term debts. The current ratio specifically targets the immediate financial obligations of a company, emphasizing its operational efficiency in maintaining working capital for daily operations.