Financial ratios are important indicators for gauging a company’s financial health. They show the financial position of the company, including its profitability and liquidity position. The two important ratios for measuring a company’s ability to pay short term obligations and liquidity are the current and quick ratios. This article covers the current ratio, quick ratio and current vs quick ratio in detail.
Current Ratio vs Quick Ratio – Difference between Current Ratio and Quick Ratio
Following are the key differences between the Current Ratio vs Quick Ratio:
Basis of Difference
Current Ratio
Quick Ratio
Definition
The current ratio is a liquidity ratio that computes the proportion of a company’s current assets to its current liabilities.
The quick ratio is also a liquidity ratio that computes the proportion of a company’s highly liquid assets to its current liabilities.
Approach
The current ratio is comparatively a relaxed approach to determine a company’s debt repayment capacity.
The quick ratio is a stringent and conservative approach to determine a company’s debt repayment capacity.
Consideration
Considers assets that are easily convertible to cash within a year.
Considers assets that are easily convertible to cash in 90 days or earlier.
Inventory
Includes inventory. Also, the current ratio is naturally high for firms with a strong stock of inventory.
Excludes inventory. Also, the quick ratio is low for firms with a strong stock of inventory.
Ideal Result
The ideal ratio is 2:1. However, anything above 1 is good.
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