Explanation

Liquidity ratios measure a company's ability to meet its short-term obligations using its most liquid assets. Let's analyze each option:

A. Defensive interval ratio - This is a liquidity ratio that measures how many days a company can operate using only its most liquid assets (cash, marketable securities, and receivables) without needing additional cash inflows. It's calculated as:

Defensive Interval Ratio = (Cash + Marketable Securities + Receivables) / Daily Operating Expenses

Defensive Interval Ratio = (Cash + Marketable Securities + Receivables) / Daily Operating Expenses

This is indeed a liquidity ratio.

B. Inventory turnover ratio - This is an activity ratio (also called efficiency ratio) that measures how efficiently a company manages its inventory. It's calculated as:

Inventory Turnover = Cost of Goods Sold / Average Inventory

Inventory Turnover = Cost of Goods Sold / Average Inventory

While related to working capital management, this is not classified as a liquidity ratio.

C. Working capital turnover ratio - This is also an activity ratio that measures how efficiently a company uses its working capital to generate sales. It's calculated as:

Working Capital Turnover = Revenue / Average Working Capital

Working Capital Turnover = Revenue / Average Working Capital

This measures efficiency, not liquidity.

Key distinction:

• Liquidity ratios: Focus on short-term solvency (ability to pay current liabilities)
  • Current ratio, quick ratio, cash ratio, defensive interval ratio
• Activity ratios: Focus on efficiency of asset utilization
  • Inventory turnover, receivables turnover, working capital turnover

Therefore, only the defensive interval ratio (Option A) is a true liquidity ratio.