Which metric is used to assess a company's ability to pay off current obligations?

The current ratio is a key financial metric that provides insight into a company's ability to meet its short-term obligations. It is calculated by dividing a company’s current assets by its current liabilities. A higher current ratio generally indicates that the company has more than enough assets to cover its short-term debts, which suggests a strong liquidity position. This assessment is critical for stakeholders, such as investors and creditors, who want to ensure that the company can satisfy its liabilities when they come due.

In contrast, return on equity measures the profitability relative to shareholders' equity and does not focus on the payment of obligations. The debt-to-equity ratio illustrates the proportion of debt to equity financing but does not directly indicate liquidity or the ability to cover current obligations. Lastly, gross margin reflects the difference between revenue and cost of goods sold, focusing on profitability rather than liquidity. Therefore, the current ratio is the appropriate choice for evaluating a company’s ability to pay off its current obligations.