Canadian Securities Course (CSC) Level 2 Practice Exam

Which ratio is considered a measure of the short-term ability of a company to pay its maturing obligations and to meet unexpected cash needs?

1. Return on common equity

2. Gross profit margin

3. Working capital/net current assets

4. Inventory turnover

The correct answer is: Working capital/net current assets

The selected ratio, which represents the measure of a company's short-term liquidity and ability to meet its obligations, is indeed the correct answer. Working capital, which is calculated as current assets minus current liabilities, reflects the funds available to cover short-term liabilities. When divided by net current assets, this ratio emphasizes how effectively a company can utilize its current assets to cover its current liabilities. A higher ratio indicates a stronger capability to meet maturing obligations and manage unexpected cash requirements. In contrast, other options focus on different aspects of financial performance. The return on common equity measures profitability in relation to shareholder equity but does not directly address liquidity. The gross profit margin provides insight into operational efficiency by illustrating how much profit remains after covering the cost of goods sold, but it does not reflect short-term liquidity. Inventory turnover examines the efficiency of inventory management and sales but does not directly indicate a company's immediate ability to meet financial obligations. Thus, the chosen ratio is the most relevant when assessing short-term financial health.