How is the current ratio calculated?

The current ratio is calculated by dividing current assets by current liabilities. This ratio is vital for assessing a company's short-term liquidity and financial health. It indicates the ability of the company to cover its short-term obligations with its most liquid assets.

A higher current ratio suggests that the company has a good liquidity position, meaning it can easily meet its current liabilities with current assets. This is particularly important for creditors and investors, as it provides insight into the company's operational efficiency and financial stability. By using the current ratio properly, stakeholders can gauge how well a company is managing its assets and liabilities, making it a crucial metric in financial analysis.