Financial ratios are vital tools for analyzing a firm's performance and financial health. Among these, liquidity ratios specifically measure a company's ability to meet its short-term obligations, typically those due within one year. The question asks which ratio measures a firm's liquidity. The Current ratio is the primary measure of liquidity, calculated by dividing current assets by current liabilities. It indicates how many times a company's current assets can cover its current liabilities, providing insight into its short-term solvency.
The other options measure different aspects of a firm's financial standing. The Debt-equity ratio is a solvency ratio, indicating the proportion of debt financing relative to equity financing, thus measuring long-term financial leverage, not short-term liquidity. The Gross profit ratio is a profitability ratio, showing the percentage of revenue left after deducting the cost of goods sold. Return on equity is also a profitability ratio, measuring the net income generated for each dollar of shareholders' equity. Therefore, only the current ratio directly assesses a firm's ability to meet its immediate financial commitments.