A ratio that is a measure of a company’s short-term liquidity is the
A times interest earned.
B inventory turnover.
C asset turnover.
D debt to total assets ratio.
The correct answer and explanation is:
The correct answer is: None of the options listed directly measure a company’s short-term liquidity.
However, since this is a multiple-choice question and requires choosing the best among the given options, the closest match for evaluating liquidity is:
None are ideal, but we must clarify why.
Let’s analyze each option:
A. Times Interest Earned (TIE)
- Definition: Measures a firm’s ability to meet interest obligations.
- Formula: TIE=Earnings before interest and taxes (EBIT)Interest expense\text{TIE} = \frac{\text{Earnings before interest and taxes (EBIT)}}{\text{Interest expense}}
- Purpose: Solvency ratio, not a liquidity ratio. Indicates long-term ability to pay interest.
B. Inventory Turnover
- Definition: Measures how many times inventory is sold and replaced over a period.
- Formula: Inventory Turnover=Cost of Goods Sold (COGS)Average Inventory\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}
- Purpose: Efficiency ratio. While it may indirectly affect liquidity, it’s not a direct measure.
C. Asset Turnover
- Definition: Measures how efficiently a company uses assets to generate sales.
- Formula: Asset Turnover=Net SalesAverage Total Assets\text{Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}}
- Purpose: Efficiency ratio. Reflects operational performance, not liquidity.
D. Debt to Total Assets Ratio
- Definition: Measures the proportion of assets financed by debt.
- Formula: Debt to Assets=Total LiabilitiesTotal Assets\text{Debt to Assets} = \frac{\text{Total Liabilities}}{\text{Total Assets}}
- Purpose: Solvency ratio, indicating financial leverage, not short-term liquidity.
Correct Ratio for Short-term Liquidity (not listed):
Current Ratio or Quick Ratio
- Current Ratio = Current Assets / Current Liabilities
- Quick Ratio = (Current Assets – Inventory) / Current Liabilities
These directly assess a company’s ability to pay short-term obligations.
Conclusion:
None of the provided answers directly measure short-term liquidity. But if forced to choose the closest, inventory turnover (Option B) may give some indirect insights, as it relates to how efficiently current assets (inventory) are converted into cash. However, for true short-term liquidity, look at current or quick ratios.