As referred to in the Acid Test Ratio explanation, the Current Ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations.
To gauge this ability, the current ratio considers the total value of assets of the company (both immediately liquid and illiquid) relative to that of the company’s total liabilities.
The current ratio is also known as the working capital ratio.
The formula for calculating a company’s current ratio, then, is:
Current Ratio = Current Assets / Current Liabilities
The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities.
The current ratio or working capital ratio is used principally to give an idea of the company’s ability to pay back its liabilities (debts and accounts payable / creditors) with its assets (cash, inventory, accounts receivable / trade debtors).