The current ratio is calculated by dividing a company’s current assets by its current liabilities. Ratios of 1 or higher indicate short-term solvency.

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Current ratio reflects a company's current assets (those that can be easily converted to cash, such as inventory and accounts receivable, as well as cash on hand) divided by current liabilities ...

A company needs to have enough liquidity to meet its short-term financial obligations or else it won't be successful. The current ratio is an accounting metric that provides one measure of liquidity.