What is the formula for calculating current ratio?

The formula for calculating the current ratio is indeed current assets divided by current liabilities. This financial metric is used to evaluate a company's ability to pay its short-term obligations with its short-term assets.

Current assets include cash, inventory, and accounts receivable, all of which are expected to be liquidated or turned into cash within one year. On the other hand, current liabilities consist of debts and obligations that are due within the same time frame.

By dividing current assets by current liabilities, the current ratio provides insight into the financial health and liquidity of a company. A current ratio of less than 1 may indicate potential liquidity problems, while a ratio above 1 suggests that the company has enough assets to cover its short-term liabilities. This measure is crucial for stakeholders, including investors and creditors, when assessing the financial stability of an organization.