| Definition |
Measures a company's ability to pay short-term liabilities with all current assets. |
Measures a company's ability to pay short-term liabilities with liquid assets excluding inventory. |
| Formula |
Current Ratio = Current Assets ÷ Current Liabilities. |
Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities. |
| Includes |
All current assets: cash, accounts receivable, inventory, marketable securities, etc. |
Only liquid assets: cash, accounts receivable, and marketable securities (excludes inventory). |
| Purpose |
Assesses overall short-term liquidity position of the company. |
Assesses immediate liquidity by focusing on assets quickly convertible to cash. |
| Liquidity Assessment |
Less conservative as it includes inventory which may not be quickly converted to cash. |
More conservative, excludes inventory due to uncertainty in quick conversion. |
| Ideal Value |
Generally above 1 indicates good short-term financial health. |
Generally above 1 is preferred, indicating strong immediate liquidity. |
| Use Cases |
Used by creditors and analysts to evaluate company’s ability to meet obligations in the short term. |
Used when quick payment capability is crucial, such as during financial stress or crisis. |
| Limitation |
May overstate liquidity if inventory is not easily sold. |
May be too strict for companies with fast inventory turnover. |
| Industry Impact |
Industries with slow-moving inventory may show higher current ratio but lower quick ratio. |
More relevant for industries where inventory cannot be quickly liquidated. |
| Financial Health Insight |
Indicates ability to cover liabilities but less sensitive to cash flow timing. |
Better indicator of immediate cash availability to meet liabilities. |
| Example |
Current Assets $150,000, Current Liabilities $100,000 → Current Ratio = 1.5. |
Current Assets $150,000, Inventory $50,000, Current Liabilities $100,000 → Quick Ratio = (150,000–50,000)/100,000 = 1.0. |
Current Ratio vs Quick Ratio