What financial metric is commonly used to measure a municipality's liquidity?

The current ratio is a key financial metric used to assess a municipality's liquidity, which reflects its ability to meet short-term obligations with its short-term assets. This ratio is calculated by dividing current assets by current liabilities, providing a clear picture of the available resources that can be readily accessed to cover immediate financial commitments.

In the context of municipal finance, a higher current ratio indicates a stronger liquidity position, suggesting that the municipality can easily convert its assets into cash to settle its debts as they arise. This is particularly important for municipalities, as they often have specific funding needs and cash flow patterns tied to tax receipts and service expenditures.

Other metrics like the debt-to-equity ratio, return on investment, and net profit margin, while useful in various financial assessments, do not specifically address liquidity. The debt-to-equity ratio focuses on the leverage and capital structure of an entity, return on investment evaluates the profitability of investments, and net profit margin examines the efficiency of a municipality in generating profit relative to its revenues. Thus, they are not appropriate measures for liquidity analysis.