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Current Ratio vs Quick Ratio: What's the Difference?

When it comes to financial ratios, there are all sorts of different ways to measure a company's performance. But two of the most commonly used ratios are the current ratio and the quick ratio. So, what's the difference between these two ratios?

What is the Current Ratio?

The current ratio is a company's current assets divided by its current liabilities. In other words, it's a way to measure whether a company has enough assets on hand to cover its short-term obligations. A current ratio of 1.0 means that a company has exactly enough assets to cover its liabilities. A current ratio of less than 1.0 means that a company doesn't have enough assets to cover its liabilities. And a current ratio of more than 1.0 means that a company has more assets than it needs to cover its liabilities.

What is the Quick Ratio?

The quick ratio is a company's current assets minus its inventory, divided by its current liabilities. In other words, it's a way to measure whether a company has enough liquid assets on hand to cover its short-term obligations. A quick ratio of 1.0 means that a company has exactly enough liquid assets to cover its liabilities. A quick ratio of less than 1.0 means that a company doesn't have enough liquid assets to cover its liabilities. And a quick ratio of more than 1.0 means that a company has more liquid assets than it needs to cover its liabilities.

What's the Difference Between the Current Ratio and the Quick Ratio?

The main difference between the current ratio and the quick ratio is that the current ratio includes inventory in its calculation, while the quick ratio does not. Inventory is not considered to be a liquid asset, so it's not included in the quick ratio. For this reason, the quick ratio is often seen as a more accurate measure of a company's liquidity than the current ratio.

Why is the Current Ratio Important?

The current ratio is important because it's a good way to measure a company's short-term financial health. A company with a healthy current ratio is less likely to default on its obligations, and is more likely to weather an economic downturn. On the other hand, a company with a poor current ratio is more likely to default on its obligations, and is more likely to struggle during an economic downturn.

Why is the Quick Ratio Important?

The quick ratio is important because it's a good way to measure a company's liquidity. A company with a healthy quick ratio is less likely to default on its obligations, and is more likely to weather an economic downturn. On the other hand, a company with a poor quick ratio is more likely to default on its obligations, and is more likely to struggle during an economic downturn.

How to Calculate the Current Ratio

The current ratio is calculated by dividing a company's current assets by its current liabilities. For example, let's say that a company has $10,000 in cash, $5,000 in accounts receivable, $2,000 in inventory, and $8,000 in current liabilities. The company's current ratio would be $10,000/$8,000, or 1.25.

How to Calculate the Quick Ratio

The quick ratio is calculated by subtracting a company's inventory from its current assets, and then dividing the result by the company's current liabilities. For example, let's say that a company has $10,000 in cash, $5,000 in accounts receivable, $2,000 in inventory, and $8,000 in current liabilities. The company's quick ratio would be ($10,000-$2,000)/$8,000, or 1.0.

What is a Good Current Ratio?

There is no hard and fast rule for what is a good current ratio. However, a current ratio of 1.5 or higher is generally considered to be healthy. A current ratio of less than 1.0 is generally considered to be unhealthy. And a current ratio of more than 2.0 is generally considered to be very healthy.

What is a Good Quick Ratio?

There is no hard and fast rule for what is a good quick ratio. However, a quick ratio of 1.0 or higher is generally considered to be healthy. A quick ratio of less than 1.0 is generally considered to be unhealthy. And a quick ratio of more than 2.0 is generally considered to be very healthy.

The Bottom Line

The current ratio and the quick ratio are two of the most important financial ratios. They are both good ways to measure a company's financial health. The main difference between the two ratios is that the current ratio includes inventory in its calculation, while the quick ratio does not. For this reason, the quick ratio is often seen as a more accurate measure of a company's liquidity than the current ratio.

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