Which ratio is commonly used to measure financial health?

The current ratio is commonly used to measure financial health because it assesses a company's ability to meet its short-term obligations with its short-term assets. This ratio is calculated by dividing current assets by current liabilities, providing insight into the liquidity position of the business. A higher current ratio indicates a stronger financial health, suggesting that the company has sufficient assets to cover its liabilities, which is critical for operational stability and solvency.

In contrast, while the price-to-earnings ratio evaluates a company’s stock price relative to its earnings, it is more focused on market valuation rather than immediate financial health. The operating margin measures operational efficiency and profitability by indicating how much profit a company makes on its sales after paying for variable costs. Investment turnover reflects how effectively a company uses its assets to generate sales, but it does not directly address liquidity or short-term financial stability. Therefore, the current ratio remains the quintessential measure of financial health in the short term, reflecting the company's ability to sustain its operations and obligations.