What is the formula for the Current Ratio?

The Current Ratio is a key financial metric used to assess a company's liquidity and short-term financial health. It measures the ability of a company to pay off its short-term liabilities with its short-term assets. The correct formula for the Current Ratio is obtained by dividing current assets by current liabilities.

Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted to cash or used up within one year. Current liabilities are obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debt. By using this formula, businesses can determine whether they have enough resources to cover their immediate obligations, which is crucial for maintaining operational stability.

Understanding the Current Ratio allows stakeholders, including investors and creditors, to evaluate the company's financial robustness and make informed decisions. A ratio greater than 1 typically indicates good short-term financial health, while a ratio less than 1 could signify potential liquidity issues.