The two basic measures of liquidity are ROE and ROA.

Question

BlackTom AI · Accepted Answer

In this true/false prompt, we must examine what the term liquidity refers to in financial analysis.
Option 1: 'True' would claim that ROE (return on equity) and ROA (return on assets) are the two basic measures of liquidity. This is misleading because liquidity is about a firm's ability to meet short-term obligations using its liquid assets. Common liquidity metrics are the current ratio, quick (acid-test) ratio, and cash ratio, which focus on assets easily converted to cash in the near term.
Option 2: 'False' correctly identifies that ROE and ROA are profitability or efficiency ratios, not liquidity ratios. ROE measures net income earned per unit of shareholders’ equity, while ROA measures net income or EBIT relative to total assets, depending on the formulation. These ratios assess profitability and how effectively assets or equity are used to generate earnings, not the firm’s ability to cover short-term liabilities.
Additionally, confusing liquidity with profitability is a common misconception. Liquidity concerns the timing and amount of cash inflows and outflows and the capacity to meet obligations as they come due, whereas ROE and ROA focus on earnings generation relative to capital.
In summary, the statement misclassifies categories of financial metrics: liquidity metrics differ from ROE and ROA, which are not liquidity measures.

The two basic measures of liquidity are ROE and ROA.

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