What are the main differences between the current ratio and the quick ratio?

By Jean Folger AAA
A:

The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability to pay short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The current ratio is calculated by dividing current assets by current liabilities.

The quick ratio, on the other hand, is a liquidity indicator that filters the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities (you can think of the “quick” part as meaning assets that can be liquidated fast). The quick ratio, also called the “acid-test ratio,” is calculated by adding cash & equivalents, marketable investments and accounts receivables, and dividing that sum by current liabilities.

The main difference between the current ratio and the quick ratio is that the latter offers a more conservative view of the company’s ability to meets its short-term liabilities with its short-term assets because it does not include inventory and other current assets that are more difficult to liquidate (i.e., turn into cash). By excluding inventory (and other less liquid assets) the quick ratio focuses on the company’s more liquid assets.

RELATED FAQS

  1. What is the formula for calculating earnings per share (EPS) in Excel?

    Understand the basics of the earnings per share ratio and how this important financial metric is calculated in Excel and ...
  2. How do I calculate dividend payout ratio from a balance sheet?

    Understand what the dividend payout ratio indicates and learn how it can be calculated using the figures from a company's ...
  3. How do I calculate the debt-to-equity ratio in Excel?

    Understand the basics of the debt to equity ratio, how it is interpreted as a measure of financial stability and how it is ...
  4. How can I calculate the acid test ratio in Excel?

    Understand how the acid test ratio is used by analysts to determine the financial health of a company and how to calculate ...
RELATED TERMS
  1. Quick Ratio

    An indicator of a company’s short-term liquidity. The quick ratio ...
  2. Current Ratio

    A liquidity ratio that measures a company's ability to pay short-term ...
  3. Best's Capital Adequacy Relativity (BCAR)

    A rating of an insurance company’s balance sheet strength. Best’s ...
  4. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  5. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  6. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...

You May Also Like

Related Articles
  1. Fundamental Analysis

    Dynamic Current Ratio: What It Is And ...

  2. Investing

    What Happened To Obama’s Amnesty Bill?

  3. Charts & Patterns

    The Future of Qualcomm's Stock

  4. Fundamental Analysis

    Earnings Quality, the Facebook Example

  5. Trading Strategies

    Novice Trading Strategies

Trading Center