What is current ratio?

The current ratio, sometimes referred to as the working capital ratio, is a metric
used to measure a company's ability to pay its short-term liabilities due within a
year. In other words, it shows how a company can maximize current assets to
settle its short-term obligations.

"The current ratio is simply current assets divided by current liabilities. A higher
ratio indicates a higher level of liquidity

How current ratio works 

When you calculate a company's current ratio, the resulting number

determines whether it's a good investment. A company with a current
ratio of less than 1 has insufficient capital to meet its short-term debts
because it has a larger proportion of liabilities relative to the value of
its current assets.

The current ratio is calculated using two common variables found on a

company's balance sheet: current assets and current liabilities.
The resulting figure represents the number of times a company can
pay its current short-term obligations with its current assets.  
Current assets
Current assets are all assets listed on a company's balance sheet
expected to be converted into cash, used, or exhausted within an
operating cycle lasting one year. Current assets include cash and cash
equivalents, marketable securities, inventory, accounts receivable, and
prepaid expenses. 

Current liabilities 

Current liabilities are a company's short-term obligations due and

payable in one year or one business cycle. Common current liabilities
found on the balance sheet include short-term debt, accounts payable,
dividends owed, accrued expenses, income taxes outstanding, and
notes payable.

Current ratio example

Let's take a look at a real-life example of how to calculate the current ratio
based on the balance sheet figures of Amazon for the fiscal year ending 2019.
The current assets of the retail giant stood at $96.3 billion and current
liabilities at $87.8 billion.

To calculate the current ratio, you divide the current assets by current
liabilities. So the current ratio for Amazon will be 1.1, meaning the company
has at least enough assets to pay off its short-term obligations.