Current Ratio vs Quick Ratio

Investors can use fundamental analysis to assess the financial performance of a company prior to investing. To determine the company's overall fundamental strength, it uses a variety of formulas, ratios, calculations, and other methods. When it comes to fundamental analysis, liquidity ratios are a key component.

The current and quick ratios are two types of liquidity ratios that can help you assess whether or not a company will be able to meet its debt obligations. Investors are more likely to be attracted to companies with strong liquidity ratios because they demonstrate the company's financial strength. Let's examine these ratios in detail, as well as the formula used to calculate them.

What's the current ratio?

The current rate is a liquidity indicator that investors use to assess whether a company can pay off its current liabilities using its assets. "Current liabilities" is the category that includes all short-term debts that are due within one year. All short-term assets that are easily convertible to cash within one year are included under 'current liabilities'.

Let's now see what the current ratio looks like.

Current Ratio = current assets/current liabilities

The ideal ratio for a company to its current assets should be greater than 1. A ratio of 1 to 1 is the ideal value. Anything less would indicate that the company does not have the assets necessary to pay all its liabilities, should they arise.

What's the quick ratio?

Investors use the quick ratio to assess how efficient a company's ability to pay off its current liabilities with its assets. Although it may look like the current ratio, it is more conservative than the latter because it only considers current assets that can easily be liquidated within 90 days. The acid-test ratio is also known by the quick ratio.

Let's take a closer look at the formula used to calculate the quick ratio.

Quick ratio = (cash + cash equivalents + current receivables + short-term investments) / current liabilities

A company's quick ratio should be greater than 1. If the ratio is less than 1, it means that the company cannot meet its liabilities, even if all of them fall due simultaneously.

You probably wonder, now that you have an understanding of both the ratios, what is the difference between the current and quick ratio? Here's how to find out.

How do you determine the difference between the quick ratio and the current ratio ?

Below are the main differences in the debate about the quick vs current ratio.

Current Rate	Quick Rate
The Current Ratio is a more relaxed approach to determining a company's debt repayment ability.	The Quick Ratio is a more conservative and stringent approach that's used to determine a company's debt repayment ability.
This ratio is used to calculate the proportion of a company's current assets to its current liabilities.	This ratio is used for calculating the company's current liabilities to its highly liquid assets.
This ratio includes all current assets of the company.	This ratio includes only current assets of the company that can be liquidated to cash in less than 90 days.
The current ratio also includes the inventory stock of a company.	The Quick Ratio Does Not Include The Inventories of A Company.
Although it is possible to have more than one, it is preferable to have a ratio of 2:1.	A Quick Ratio Of 1:1 Is Preferable.
Companies with a strong inventory are likely to have a higher current ratio.	If a company has a strong inventory, the quick ratio is likely to be naturally low.

Conclusion

These two ratios might look very similar at first glance but the differences between current and quick ratio are quite obvious and abundant. Investors should not get into the current ratio/quick ratio debate. It is better to use both ratios together to determine the company's liquidity.