The current ratio is one of the most fundamental liquidity metrics in financial analysis. It measures a company's ability to pay its short-term obligations with its short-term assets. Lenders, investors, and analysts use it to assess financial health and determine whether a company can meet its near-term financial commitments.

The formula is: Current Ratio = Current Assets / Current Liabilities. A ratio above 1.0 means the company has more current assets than current liabilities. The quick ratio is a stricter test: Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities. Working capital is simply the difference: Current Assets minus Current Liabilities.

For example, with $850,000 in current assets and $450,000 in current liabilities, the current ratio is 1.89x, meaning the company has $1.89 in current assets for every $1 of current liabilities. Subtracting $200,000 inventory and $50,000 prepaid expenses gives a quick ratio of 1.33x. Working capital is $400,000, providing a comfortable buffer for unexpected expenses or temporary revenue shortfalls.