What is the formula for calculating the current ratio?

The current ratio is a key financial metric used to assess a company's liquidity, specifically its ability to cover its short-term obligations with its short-term assets. The correct formula for calculating the current ratio is current assets divided by current liabilities.

This formula provides insight into the short-term financial health of the company. A current ratio greater than 1 indicates that the company has more current assets than current liabilities, suggesting that it can easily meet its short-term obligations. Conversely, a ratio less than 1 suggests potential liquidity issues, as the company may struggle to cover its liabilities with its available assets.

The option involving the addition of current assets and current liabilities does not measure liquidity but rather combines two different financial components, which is not useful in analyzing the ability to pay short-term debts. The option with subtraction presents a calculation yielding a net position that does not reflect the company’s capability to meet its obligations directly, while dividing current liabilities by current assets would yield the inverse relation, which does not indicate whether the company is in a position of strength or weakness regarding its liquidity.