NASCLA Accredited Commercial General ContractorGeneral RequirementsMedium
A commercial general contractor is evaluating the financial health of a potential subcontractor before awarding a significant portion of a large project. The contractor reviews the subcontractor's balance sheet and income statement. To assess the subcontractor's ability to meet its short-term obligations, which financial ratio would be MOST relevant to calculate?
- AProfit Margin
- BReturn on Assets
- CDebt-to-Equity Ratio
- DCurrent Ratio
Show answer & explanationAnswer & explanation
Correct answer: D. Current Ratio
The Current Ratio is a liquidity ratio that measures a company's ability to pay off its short-term liabilities with its short-term assets. A higher current ratio indicates better short-term financial health, making it the most relevant metric for assessing the ability to meet short-term obligations.
Why the other options are wrong
- A. Profit Margin measures profitability, not the ability to meet immediate financial obligations.
- B. Return on Assets measures how efficiently assets are used to generate profit, not short-term liquidity.
- C. The Debt-to-Equity Ratio measures long-term solvency, not short-term obligations.
Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year.
- Calculated as Current Assets / Current Liabilities.
- Indicates short-term financial health.
- A ratio of 2:1 or higher is generally considered healthy.
Memory trick: Ratios reveal a company's financial story.