What does the current ratio measure in financial analysis?

The current ratio measures a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities, which provides insight into the liquidity position of the organization. A current ratio greater than one typically indicates that the company has more current assets than current liabilities, suggesting that it is in a favorable position to meet its short-term obligations. Conversely, a ratio less than one might signal potential liquidity issues, where the company may struggle to pay off its short-term debts.

The formula itself is essential in financial analysis as it reflects the operating efficiency of a firm and its financial health. This ratio can be particularly useful for creditors and investors who want to assess the risk involved in extending credit to or investing in a company. Thus, option B represents the correct calculation of the current ratio.