What is the formula for calculating the Current Ratio?

The formula for calculating the Current Ratio is defined as Current Assets divided by Current Liabilities. This ratio is a key financial metric used to assess a company's ability to pay its short-term obligations with its short-term assets.

Current Assets typically include cash, accounts receivable, and inventory, which are expected to be converted into cash or used up within one year. Current Liabilities consist of obligations that the company must settle within the same time frame, such as accounts payable and short-term loans.

By dividing Current Assets by Current Liabilities, the Current Ratio provides insight into the liquidity position of the business. A ratio greater than 1 indicates that the company has more current assets than current liabilities, suggesting a strong liquidity position. Conversely, a ratio less than 1 may indicate potential liquidity issues.

This financial metric is important for investors, creditors, and management as it helps them understand the financial health and operational efficiency of the company regarding its short-term financial obligations.