Which ratio assesses whether a business has enough cash to meet its short-term obligations?

The liquidity ratio is the measure that evaluates a business's ability to fulfill its short-term obligations, particularly its debts or liabilities that are due within one year. This ratio assesses the relationship between liquid assets (such as cash and receivables) and current liabilities, providing insight into the company's short-term financial health and operational efficiency.

A high liquidity ratio indicates that a business has sufficient cash or near-cash resources to cover its current liabilities, reducing the risk of insolvency in the short term. Financial analysts often use liquidity ratios, such as the current ratio and quick ratio, to determine if a company can maintain operations without needing additional financing.

In contrast, the other ratios mentioned focus on different aspects of a business's financial performance. Profitability ratios evaluate overall profitability and how efficiently a company generates income relative to its revenue or assets. The gearing ratio measures the proportion of a company's debt relative to its equity, assessing financial risk rather than short-term cash flow. The gross margin ratio determines the percentage of revenue that exceeds the cost of goods sold, indicating a company's efficiency at production, not its ability to meet short-term obligations.