Ontario PHBI Financial Planning & Management Practice Test

The Current Ratio is a key financial metric that assesses a company's ability to meet its short-term obligations with its short-term assets. The correct formula for calculating the Current Ratio is to divide current assets by current liabilities. This ratio provides insight into the liquidity position of a business, indicating whether it has enough resources to cover its debts that are due within the next year.

By using this formula, a higher ratio implies a stronger liquidity position, suggesting that the company is in a better position to pay off its short-term obligations. Conversely, a ratio below 1 might indicate potential liquidity issues, as it suggests that the company does not have enough assets to cover its current liabilities.

Understanding this ratio is crucial for financial analysis, creditors, and investors as it reflects the short-term financial health of a business. This calculation is widely used in various financial evaluations, making it a fundamental concept in financial management and planning.