What is a liquidity ratio used to measure?

A liquidity ratio is specifically designed to assess a company's ability to meet its short-term obligations, which include liabilities that are due within a year. These ratios provide insights into a company's financial health by indicating whether it has enough liquid assets to cover its short-term debts. Common examples of liquidity ratios include the current ratio and the quick ratio.

By focusing on the relationship between a company's current assets and its current liabilities, liquidity ratios help investors and creditors understand how well a company can sustain its operations in the short term without facing liquidity issues. This assessment is crucial for stakeholders to evaluate the risk of financial distress associated with the company. Thus, the correct answer accurately highlights the essential purpose of liquidity ratios in financial analysis.