What is the formula for calculating the current ratio?

The current ratio is a measure of a company's ability to pay its short-term obligations with its short-term assets. The formula for calculating the current ratio is to divide current assets by current liabilities.

By using this formula, you can assess liquidity; a higher current ratio indicates that a company has more assets available to cover its short-term liabilities, suggesting better short-term financial health. This ratio helps investors and creditors evaluate whether a business has enough resources to meet its imminent liabilities.

In contrast, subtracting current liabilities from current assets would result in a figure (the working capital) that does not provide a ratio or comparative measure of liquidity. Calculating current liabilities divided by current assets would yield the inverse of the current ratio, which is less commonly used for assessing liquidity. Lastly, dividing total assets by total liabilities obtains a different ratio (the debt ratio or equity ratio), which is not relevant to short-term financial position assessment.