Creditor Focus on Debtor Liquidity

Steps:

• Identify Gordon as a creditor extending credit to Sybil, the debtor.
• Determine creditor's primary concern: Sybil's ability to pay debts on time.
• Evaluate ratios: Liquidity measures like current ratio assess short-term solvency.
• Select the ratio most relevant to credit risk assessment.

Why A is correct:

• Current ratio (current assets ÷ current liabilities) directly measures Sybil's short-term liquidity to repay credit obligations promptly.

Why the others are wrong:

• B: Gross profit margin assesses profitability from sales, not liquidity for debt repayment.
• C: Mark-up is a pricing tool for sellers, irrelevant to a creditor's credit risk evaluation.
• D: Return on capital employed evaluates overall efficiency, not immediate ability to settle short-term debts.

Final answer: A