How do you calculate the current ratio?

The current ratio is a financial metric that assesses a company's ability to meet its short-term obligations using its short-term assets. To calculate the current ratio, you would take the total value of current assets and divide it by the total value of current liabilities.

Current assets typically include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within a year. Current liabilities encompass obligations that the company needs to settle within a year, such as accounts payable and other short-term debts.

By calculating the current ratio in this manner, you obtain a clear picture of the liquidity position of the business. A current ratio greater than one suggests that a company has enough current assets to cover its current liabilities, which indicates financial health and stability in meeting short-term obligations.