Which ratio is typically used to measure liquidity?

The current ratio is indeed the appropriate choice for measuring liquidity. Liquidity refers to a company's ability to meet its short-term obligations with its most liquid assets. The current ratio is calculated by dividing current assets by current liabilities. This ratio provides insight into the firm's short-term financial health by indicating whether it has enough assets that can quickly be converted to cash to cover its liabilities that are due within a year.

A higher current ratio suggests that the company is in a better position to pay off its short-term debts, making it a key indicator for stakeholders assessing financial stability. In contrast, the other ratios listed focus on different areas of financial analysis. For instance, the price-to-earnings ratio evaluates the market's expectations of a company’s future earnings potential, the debt service coverage ratio measures a company's ability to service its debt obligations, and return on assets assesses how efficiently a company utilizes its assets to generate profit. These ratios do not directly measure a company's liquidity and, therefore, are not applicable in this context.