The current ratio and quick ratio are used in Commerce and Accounting. Both are used to calculate existing assets as a ratio to different terms.
Key Takeaways
- The current ratio is a financial metric that measures a company’s ability to pay its short-term liabilities using its short-term assets; the quick ratio, also known as the acid-test ratio, is a more stringent financial metric that measures a company’s ability to pay its short-term liabilities using its most liquid assets, excluding inventory.
- The current ratio includes all short-term assets in its calculation. In contrast, the quick ratio only considers assets that can be quickly converted to cash, such as cash, marketable securities, and accounts receivable.
- The current and quick ratios are used to assess a company’s liquidity and financial health. Still, the quick ratio offers a more conservative view of a company’s ability to meet its short-term obligations, as it excludes inventory from the calculation.
Current Ratio vs. Quick Ratio
The difference between the Current and Quick ratios is that the current ratio is the ratio between existing assets and current liabilities. In contrast, the quick ratio is between the nearest cash available and current liabilities.
Want to save this article for later? Click the heart in the bottom right corner to save to your own articles box!
The current ratio is the proportion between existing assets and current liabilities. By calculating a company’s current balance, its financial status is identified.
The quick ratio is also called an acid-test ratio. It is the proportion of most liquid current assets to the current liabilities.
Comparison Table
| Parameter of Comparison | Current ratio | Quick ratio |
|---|---|---|
| Definition | The current ratio is the ratio between whatever assets a person holds to their current liabilities. | The quick ratio is between the assets that can be converted to liquid cash and current liabilities. |
| Benefits | The current ratio calculates the ratio of all the assets and the liabilities; hence this cannot be depended upon when a crisis occurs. | Quick ratio calculates the ratio between readily liquefiable assets and current liabilities; hence this cash can be a source to repay debts. |
| Efficiency | A company’s ability to solve short-term liabilities is calculated from the current ratio. | A company’s efficiency in overcoming its present financial liabilities is calculated by calculating the quick ratio. |
| Ideal ratio | 2:1 | 3:1 |
| Example | If a company has assets of $10000 and liabilities of $5000 Current ratio = $10000/$5000 = 2:1 | If the company has $2500 of inventory and supplies, then the Quick ratio = 3:2 |
What is Current Ratio?
A current ratio is the liquidity ratio from which the ability of a company to repay its short-term debts is calculated. The comparison between the existing assets and the current liabilities gives this ratio.
When creditors try to invest in a company, they would prefer one with a higher current ratio since it explains the ability of the firm to repay the credit. But having a considerable ratio is not encouraged as this shows that the firm is not using its assets in the best way, and the investors won’t be able to have high returns.
If the current ratio falls below 1, the current liabilities exceed the assets. Hence it is not safe to invest in the company. Some companies which have inventory stocks can operate with a ratio below 1.
A company’s growth can be identified by analyzing the history of current ratios in many financial years. It can also explain how a creditor can expect higher returns from the company.
What is Quick Ratio?
The quick ratio is the ability of a firm to liquefy its assets as soon as possible and repay the debts. It is the ratio between the nearest liquefiable holdings to the current liabilities.
Quick ratio considers the assets which can be converted into liquid cash. This is more specific since many assets cannot be valued when a sudden financial crisis arrives.
The quick ratio is also called an acid-test ratio. This is because of the faster results obtained from this test.
The laborers should attain the targets assigned by the company to have a better quick ratio. If the amount invested in the company is delayed because of any situation, it affects the short balance, and the company would be unable to meet its recent debts.
Main Differences Between Current Ratio and Quick Ratio
- The current ratio is the ratio between the existing assets and current liabilities. The quick ratio is the ratio between near-cash assets and current liabilities.
- Since the current ratio calculates both liquefiable and in-liquefiable assets, it cannot be trusted when a sudden need occurs. Quick ratio uses the liquefiable assets to calculate the ratio, and hence it can be used to repay sudden debts.
- The current ratio is the ability of a company to repay its short-term debts, whereas a quick ratio is an ability to repay a company’s present liabilities.
- The ideal current ratio is 2:1, whereas the ideal; quick ratio is 1:1.
- The current ratio is the amount that can be used in the long term, and the quick ratio is the amount that can be used at any moment.
- https://repository.widyatama.ac.id/xmlui/handle/123456789/7717
- https://journal.trunojoyo.ac.id/kompetensi/article/view/3661
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
