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. How are contingent liabilities reflected on a balance sheet

    Find out how to identify, treat and report contingent liabilities on the balance sheet. See how the U.S. GAAP requires contingent ...
  2. What's the difference between the coverage ratio and the levered free cash flow to ...

    Learn the differences between the equity evaluation metric, the levered free cash flow to enterprise value ratio and various ...
  3. Why is work in progress (WIP) considered a current asset in accounting?

    Find out why accountants consider work in progress (WIP) to be a current asset on the balance sheet for financial accounting ...
  4. What are some ways a company can improve on its Return on Capital Employed (ROCE)?

    Discover how the return on capital employed ratio is used by analysts and investors to measure profitability, and how a company ...
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. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  4. Nonadmitted Balance

    An item on an insurer’s balance sheet that represents reinsured ...
  5. Best's Capital Adequacy Relativity (BCAR)

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

    A deferred tax asset is an asset on a company's balance sheet ...

You May Also Like

Related Articles
  1. Investing

    Using The Current Ratio

  2. Term

    Quick Ratio

  3. Markets

    What Is The Quick Ratio?

  4. Fundamental Analysis

    Dynamic Current Ratio: What It Is And ...

  5. Term

    Current Ratio

Trading Center