Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What do liquidity ratios measure in a company?

  1. Long-term profitability

  2. Short-term ability to meet obligations

  3. Operational efficiency

  4. Debt management

The correct answer is: Short-term ability to meet obligations

Liquidity ratios specifically assess a company's short-term financial health and its ability to meet its current obligations without raising external capital. These ratios, such as the current ratio and quick ratio, provide insights into whether a company can cover its short-term liabilities with its short-term assets. When analyzing a company's liquidity, stakeholders look for a comfortable buffer that indicates a solid financial position. A higher liquidity ratio suggests that the company is well-positioned to handle its immediate cash flow needs, which is crucial for sustainability and business operations. This focus on short-term obligations differentiates liquidity ratios from other financial metrics, which may evaluate aspects like long-term profitability or operational efficiency.

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