What does the current ratio measure?

The current ratio is a financial metric that evaluates a company's ability to meet its short-term liabilities using its short-term assets. This ratio is calculated by dividing current assets by current liabilities, providing insight into whether the organization has enough resources to cover its immediate obligations.

When a company has a current ratio greater than 1, it indicates that it has more current assets than current liabilities, suggesting a favorable position regarding its liquidity. This measure is crucial for assessing financial health, especially for creditors and investors who want to understand the company's capacity to settle its debts in the near term without needing to sell long-term assets or secure additional financing.

The other choices reflect different financial aspects: return on investment pertains to profitability, the difference between revenue and expenses relates to net income, and the total amount of debts refers to a company's financial obligations without specifying their short-term nature. These do not capture the essence of what the current ratio specifically measures.