How is the Current Ratio calculated?

The Current Ratio is a financial metric used to assess a company's ability to pay off its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. This ratio provides insight into the company's liquidity and financial health.

When you look at the components of the ratio, current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted to cash or used within a year. Current liabilities encompass debts and obligations due within the same time frame. By using the formula of current assets divided by current liabilities, you're determining how many dollars of assets are available per dollar of liabilities. A ratio greater than one typically indicates good liquidity, suggesting that the company can cover its short-term obligations.

This understanding highlights the relevance of current assets and current liabilities and emphasizes the importance of proper management of short-term resources and obligations for financial stability.