Canadian Securities Course (CSC) Level 2 Practice Exam

Which ratio is used to assess the short-term ability of a company to pay its maturing obligations according to the text?

1. Quick ratio

2. Risk analysis ratio

3. Interest coverage ratio

4. Dividend yield ratio

The correct answer is: Quick ratio

The quick ratio is indeed the appropriate choice for assessing a company’s short-term ability to pay its maturing obligations. This financial metric focuses on a company's most liquid assets—those that can be converted into cash quickly—relative to its current liabilities. It excludes inventory from current assets, providing a more conservative view of liquidity since inventories can sometimes be difficult to liquidate quickly. When evaluating a company’s immediate financial health, the quick ratio can give stakeholders insight into whether the company has sufficient liquid assets to cover its short-term debts, such as accounts payable and other liabilities due within a year. This makes it a vital tool for investors and creditors who want to understand a company's short-term financial resilience. Other options like the risk analysis ratio, interest coverage ratio, and dividend yield ratio serve different purposes. The risk analysis ratio often assesses overall business risk rather than liquidity, the interest coverage ratio evaluates a company's ability to meet interest obligations on its debt, and the dividend yield ratio measures the income return on investment relative to dividends. Therefore, they do not specifically address the immediate obligation to pay current liabilities as effectively as the quick ratio does.