What does the cash ratio measure?

The cash ratio measures the ability of a company to use its cash and cash equivalents to pay off its current liabilities. This financial metric is particularly important as it reflects the immediate liquidity position of a business, indicating how much cash is available to cover short-term obligations without relying on the collection of receivables or the sale of inventories. By comparing cash to current liabilities, stakeholders can assess the company's short-term financial health and its capacity to meet obligations as they come due.

In contrast, the other options address different aspects of financial performance. Generating cash from operations focuses on operational efficiency, while the ratio of cash to long-term debts relates to long-term solvency rather than short-term liquidity. The overall profit margin of a company pertains to profitability rather than liquidity. Each of these perspectives provides valuable insights, but they do not specifically measure the immediate cash position relative to current liabilities, which is the primary purpose of the cash ratio.