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 can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
  2. What are some alternative liquidity ratios to the cash ratio?

    Learn what the cash ratio measures, and understand what two other liquidity ratios can be used by a company to replace the ... Read Answer >>
  3. What is the formula for calculating the current ratio?

    Find out how to calculate the current ratio and what that result can tell you about a potential investment. Read Answer >>
  4. What is the relationship between the cash ratio and liquidity?

    Understand the relationship between a company's cash ratio and its liquidity. Learn what the cash ratio measures and what ... Read Answer >>
  5. How can the current ratio be misinterpreted by investors?

    Statistics can be misleading, and numbers on the balance sheet are no exception. Find out how the current ratio can confuse ... Read Answer >>
  6. What is the proper ratio between working capital, current assets and current liabilities?

    Explore the working capital ratio, a basic liquidity measurement intended to represent the current relationship between a ... Read Answer >>
Related Articles
  1. Markets

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  2. Fundamental Analysis

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  3. Term

    What Are Quick Assets?

    A company’s quick assets can be easily converted into cash.
  4. Fundamental Analysis

    Financial Analysis: Solvency Vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ...
  5. Economics

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
  6. Investing Basics

    Useful Balance Sheet Metrics

    These metrics can help you better understand the information found on balance sheets.
  7. Markets

    Liquidity Measurement Ratios: Introduction

    By Richard Loth (Contact | Biography)The first ratios we'll take a look at in this tutorial are the liquidity ratios. Liquidity ratios attempt to measure a company's ability to pay off its short-term ...
  8. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  9. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  10. Investing

    Current Liabilities

    Current Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
RELATED TERMS
  1. Quick Liquidity Ratio

    The total amount of a company’s quick assets divided by the sum ...
  2. Liquidity Ratios

    A class of financial metrics that is used to determine a company's ...
  3. Liquidity

    The degree to which an asset or security can be quickly bought ...
  4. Current Assets

    A balance sheet account that represents the value of all assets ...
  5. Asset Coverage Ratio

    A test that determines a company's ability to cover debt obligations ...
  6. Current Liabilities

    A company's debts or obligations that are due within one year. ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center