Final answer:
The correct answer is the inventory turnover ratio. Option D is correct.
Step-by-step explanation:
The correct answer is inventory turnover ratio.
Liquidity ratios are financial ratios used to measure a company's ability to meet its short-term obligations with its current assets. They assess a company's ability to convert its assets into cash quickly. The inventory turnover ratio is one such liquidity ratio that measures how quickly a company sells its inventory.
The formula for calculating the inventory turnover ratio is:
Calculate the cost of goods sold (COGS) by adding the beginning inventory to purchases and subtracting ending inventory.
Divide the COGS by the average inventory.
Multiply the result by 365 to find the average number of days it takes for the inventory to turn over.
The question which asks about identifying a liquidity ratio from amongst several options is asking about financial ratios used to assess a company's ability to meet its short-term debts and obligations. Among the choices provided, the option classified as a liquidity ratio is inventory turnover ratio.
Other options like debt to equity ratio, profit margin, and gross profit ratio represent leverage, profitability, and operational efficiency ratios, respectively. Liquidity ratios are meant to measure a company's capacity to convert its assets into cash to pay off liabilities, with examples including the current ratio, quick ratio, and cash ratio.