What does the current ratio assess?

The current ratio specifically assesses a company's ability to pay off its current liabilities using its current assets. It is a liquidity measurement that compares a company's current assets, such as cash, accounts receivable, and inventory, with its current liabilities, which include obligations that are due within one year.

When the current ratio is calculated, a higher number indicates a greater liquidity position, meaning the company has more than enough short-term assets to cover its short-term liabilities. This measure is crucial for stakeholders, such as investors and creditors, as it helps them evaluate the financial health and short-term solvency of a company.

The options related to assessing the ability to pay long-term liabilities, generate new revenue, or maintain profitability relate to different financial metrics or aspects of a company's performance and are not the focus of the current ratio. These other areas require different analytics that examine long-term solvency or operational efficiency rather than immediate liquidity.