How is the current ratio calculated?

The current ratio is an important financial metric used to assess a company's liquidity position, which indicates its ability to cover short-term obligations with its short-term assets. This ratio is calculated by dividing current assets by current liabilities.

Current assets include all assets that a company expects to convert into cash or use up within one year, such as cash, accounts receivable, and inventory. Current liabilities, on the other hand, are obligations the company needs to settle within one year, including accounts payable, short-term debt, and other similar liabilities.

By calculating the current ratio as current assets divided by current liabilities, stakeholders can see how many dollars in current assets are available to cover every dollar in current liabilities. A ratio greater than one indicates that the company has more current assets than current liabilities, suggesting a good liquidity position. This calculation provides valuable insight into the company's financial health and its short-term solvency.