How is 'current ratio' calculated?

The current ratio is a key financial metric used to assess a company's short-term liquidity and ability to meet its short-term obligations. It is calculated by dividing current assets by current liabilities. This ratio provides insight into the company's ability to cover its short-term obligations with its short-term assets. A ratio greater than 1 indicates that the company has more current assets than current liabilities, suggesting a healthy liquidity position.

In this context, current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used within a year. Current liabilities are obligations that the company needs to settle within the same time frame, such as accounts payable and short-term debt. By analyzing the current ratio, stakeholders can gauge how efficiently the company can use its short-term assets to satisfy its short-term debts.