Future Business Leaders of America (FBLA) Agribusiness Practice Test

What does the current ratio measure?

1. The company's ability to pay short-term obligations

2. The efficiency of asset management

3. The profitability from core operations

4. The potential for leverage

The correct answer is: The company's ability to pay short-term obligations

The current ratio measures a company's ability to pay its short-term obligations using its current assets. This financial metric is calculated by dividing current assets, such as cash, inventory, and accounts receivable, by current liabilities, which include accounts payable and other debts due within one year. A current ratio greater than one indicates that a company has more current assets than current liabilities, suggesting it is in a solid position to meet its short-term financial commitments. This ratio is crucial for assessing liquidity and financial health, as it provides insights into how well a company can manage its immediate financial responsibilities. In contrast, the other choices focus on different aspects of financial analysis. The efficiency of asset management refers to how well a company utilizes its assets to generate revenue, which is not what the current ratio assesses. Profitability from core operations relates to a company's capacity to produce profit from its main business activities, while leverage pertains to the use of debt to finance assets, neither of which are evaluated by the current ratio.