How is the current ratio calculated?

The current ratio is calculated by dividing current assets by current liabilities. This financial metric is a liquidity ratio that assesses a company's ability to pay short-term obligations with its short-term assets. A higher current ratio indicates that a company has more current assets than current liabilities, which suggests a better liquidity position and a lower risk of financial distress in the short term. This calculation is fundamental for businesses and investors as it provides insight into the company's operational efficiency and financial health.

The other options provided reflect different financial concepts. For example, total liabilities divided by total assets relates to the debt-to-asset ratio, which assesses the proportion of a company's assets financed by liabilities. Current assets multiplied by current liabilities does not yield a meaningful ratio and does not provide insight into liquidity. Finally, net income divided by total equity is known as the return on equity (ROE) ratio, which measures the profitability of a company relative to shareholders' equity. Each of these calculations serves a different purpose in financial analysis but does not pertain to assessing liquidity in the same way the current ratio does.