Financial Statement Analysis Practice Test 2025 – The Complete All-in-One Guide to Exam Success!

The current ratio is a key financial metric used to assess a company's short-term liquidity and overall financial health. It measures the ability of a company to cover its short-term obligations with its short-term assets. The formula for calculating the current ratio is indeed current assets divided by current liabilities.

Current assets typically include cash, accounts receivable, inventory, and other assets that are expected to be converted to cash or consumed within one year. Current liabilities consist of obligations that the company must settle within the same time frame, such as accounts payable, short-term loans, and other liabilities.

By using this formula, you can determine how many dollars in current assets a company has for every dollar of current liabilities. A current ratio greater than one generally indicates that the company is in a good position to meet its short-term obligations, while a ratio less than one may signal potential liquidity issues. This makes the current ratio a valuable tool for investors, creditors, and management when evaluating a company's financial stability.