Which ratio is considered useful for comparing liquidity between different companies?

The current ratio is a key indicator of a company’s liquidity, which refers to the ability of a company to meet its short-term obligations. It is calculated by dividing current assets by current liabilities. This ratio provides insight into how well a company can cover its short-term debts with its short-term assets, which is essential for assessing financial health.

When comparing liquidity across different companies, the current ratio serves as a standardized measure that allows for meaningful comparisons. A higher current ratio indicates a greater capacity to cover short-term liabilities, suggesting better liquidity. Because companies within the same industry may have different asset and liability structures, the current ratio helps in evaluating which companies are in a stronger position to handle their immediate financial obligations.

In contrast, the debt-to-equity ratio, return on equity, and price-to-earnings ratio measure different aspects of financial health, such as leverage, profitability, and value assessment, respectively, rather than specifically addressing liquidity. These ratios serve important roles in financial analysis, but they do not provide the direct insight into a company's ability to manage its short-term debt obligations that the current ratio does.