Which ratio assesses a firm's ability to meet its short-term debts?

The Working Capital Ratio is crucial in assessing a firm's ability to meet its short-term debts. This ratio is calculated by subtracting current liabilities from current assets, resulting in a figure that indicates the amount of capital available to cover obligations due within one year. A positive working capital suggests that the company has more current assets than current liabilities, which is essential for short-term financial health and operational stability.

In contrast, the other ratios listed serve different purposes in financial analysis. The Quick Asset Ratio focuses specifically on the most liquid assets, excluding inventory from current assets, to determine the ability to pay immediate obligations. While important, it provides a narrower view than the overall working capital. The Gross Profit Margin reflects a company’s efficiency in producing goods versus its cost of sales, which relates more to profitability than liquidity. Debtors Turnover measures how effectively a company collects its receivables, indicating operational efficiency rather than immediate financial solvency. Thus, the Working Capital Ratio is the most comprehensive measure for determining a firm's short-term debt capacity.