What is the formula for the current ratio?

The current ratio is a key financial metric used to assess a company's ability to meet its short-term obligations with its short-term assets. The correct formula for the current ratio is calculated by dividing current assets by current liabilities.

This ratio provides insight into the liquidity and financial health of the company. A higher current ratio indicates that the company has more current assets than current liabilities, which implies a stronger ability to cover its short-term debts.

In context, the current assets include cash, accounts receivable, inventory, and any other assets that are expected to be converted into cash or used within one year. Current liabilities, on the other hand, encompass obligations that are due within the same timeframe, such as accounts payable and short-term debt. Analyzing this ratio helps stakeholders like investors, creditors, and management understand the company's short-term financial position and liquidity risk.