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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.

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What is Current Ratio?

The current ratio is a liquidity ratio that investors and analysts use to understand the debt repayment capacity of the company. It measures if the company is able to pay off all its current liabilities using its current assets. All obligations that have to be paid off within one year are current liabilities. On the other hand, all the assets that can be converted into cash within one year are current assets. 

Current Ratio Formula

Current Ratio = Current Assets / Current Liabilities

What is Quick Ratio?

The quick ratio is also a liquidity ratio that individuals use to estimate the debt repayment capacity of a company. However, the quick ratio considers only highly liquid assets rather than current assets. Thus, this is a major difference between current ratio and quick ratio. Quick ratio measures if the company is able to pay off all its current liabilities using its highly liquid assets. Highly liquid assets are current assets that can be liquidated in less than 90 days. 

Quick Ratio Formula

Quick Ratio = (Cash + Cash Equivalents + Current Receivables + Short Term Investments) / Current Liabilities

Current Ratio Vs Quick Ratio: Key Differences

The following table summarizes the key differences between quick ratio and current ratio:

Basis of DifferenceCurrent RatioQuick Ratio
RatioCurrent Assets to Current LiabilitiesHighly Liquid Assets to Current Liabilities
ApproachRelaxed approach to determine A company’s debt repayment capacity.A stringent approach to determine a company’s debt repayment capacity. 
ConsiderationConsiders assets that are easily convertible to cash within a year.Considers assets that are easily convertible to cash in 90 days or earlier.
InventoryIncludesExcludes
Ideal Result2:11:1

Current Ratio vs Quick Ratio – Difference between Current Ratio and Quick Ratio

Meaning

The current ratio is a liquidity ratio that computes the proportion of a company’s current assets to its current liabilities. On the other hand, 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. On the other hand, the quick ratio is a stringent and conservative approach to determine a company’s debt repayment capacity.

Consideration

The current ratio considers assets that are easily convertible to cash within a year. While quick ratio considers assets that are easily convertible to cash in 90 days or earlier.

Inventory

The current ratio includes inventory. Also, the current ratio is naturally high for firms with a strong stock of inventory. On the other hand, the quick ratio excludes inventory. Also, the quick ratio is low for firms with a strong stock of inventory.

Ideal Ratio

The ideal current ratio is 2:1. However, anything above 1 is good. On the other hand, the ideal quick ratio is 1:1.

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