What does the cash ratio measure?

The cash ratio measures a company's liquidity by assessing its ability to cover its current liabilities using its most liquid assets, which are cash and cash equivalents. This ratio provides a stringent view of a company's financial health in the short term, reflecting the extent to which current liabilities can be met with available cash. The focus on cash and marketable securities highlights the company's immediate liquidity position, allowing stakeholders to quickly evaluate whether a business can handle its short-term obligations without relying on receivables or inventory, which may take longer to convert into cash.

In contrast, other options reference different aspects of financial health. The ability to pay long-term debts relates more closely to solvency measures, rather than immediate liquidity. Overall profitability pertains to a company's ability to generate earnings relative to expenses over time, which is not what the cash ratio specifically indicates. Sales effectiveness involves analyzing the efficiency of sales practices and does not factor in liquidity directly. Thus, the cash ratio is distinct in its focus on immediate cash resources versus obligations.