Certified Valuation Analyst (CVA) Practice Exam

What does the current ratio measure?

1. Net income to total assets

2. Current assets divided by current liabilities

3. Long-term debt to equity

4. Revenue to expenses

The correct answer is: Current assets divided by current liabilities

The current ratio is a financial metric used to evaluate a company's ability to cover its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities. This ratio provides insight into a company's liquidity and financial health. A higher current ratio indicates that a company has more current assets relative to current liabilities, suggesting that it is in a stronger position to meet its short-term obligations. In the context of financial analysis, understanding this ratio is crucial, as it helps stakeholders assess whether a business can easily fund its day-to-day operations and manage emergencies without having to secure additional financing. A current ratio greater than one typically indicates that the business has more assets than liabilities, which is often viewed as a sign of financial stability. The other options relate to different financial metrics that measure other aspects of a company’s financial performance or structure, such as profitability or capital structure, but they do not pertain to the liquidity or short-term financial health that the current ratio specifically assesses.