What financial ratio would be used to assess liquidity?

The current ratio is the appropriate financial ratio to assess liquidity because it evaluates a company's ability to meet its short-term obligations with its short-term assets. This ratio is calculated by dividing a company’s current assets by its current liabilities. A higher current ratio indicates that a company has a larger buffer of current assets relative to its current liabilities, which suggests good financial health and an ability to cover debts as they come due.

In the context of assessing liquidity, this ratio is crucial because it directly measures the most immediate financial resources accessible to a company in order to pay off its short-term debts, thus providing an insight into the company’s financial stability and operational efficiency.

In contrast, other ratios like the debt-to-equity ratio focus on a company’s leverage and capital structure rather than its ability to handle short-term liabilities. The gross profit margin pertains to profitability by analyzing how much revenue exceeds the cost of goods sold, and return on equity assesses profitability relative to shareholders' equity, neither of which directly address liquidity concerns.