What is the Difference Between Quick Ratio and Current Ratio?
🆚 Go to Comparative Table 🆚The main difference between the quick ratio and the current ratio lies in the assets they consider and the time frame they measure. Both ratios are liquidity ratios that measure a company's ability to pay off its short-term liabilities with its short-term assets:
- Quick Ratio: This ratio is considered more conservative as it only includes highly-liquid assets, such as cash, cash equivalents, and liquid securities, in its calculation. It excludes inventory and prepaid expenses. The quick ratio offers short-term insights, typically about three months. The formula for the quick ratio is:
(Cash + Cash Equivalents + Liquid Securities + Receivables) ÷ Current Liabilities
- Current Ratio: This ratio includes all current assets in its calculation, such as cash, accounts receivable, and inventory. It offers long-term insights, typically about a year or longer. The formula for the current ratio is:
Current Assets ÷ Current Liabilities
In summary:
- The quick ratio only uses quick assets and excludes any assets that cannot be liquidated and converted into cash within a short time frame.
- The current ratio considers all holdings that can be liquidated and converted into cash within a reasonable time frame.
- The quick ratio excludes inventory from its calculations, while the current ratio includes inventory.
- A 1:1 result is ideal for the quick ratio, while a 2:1 result is ideal for the current ratio.
On this pageWhat is the Difference Between Quick Ratio and Current Ratio? Comparative Table: Quick Ratio vs Current Ratio
Comparative Table: Quick Ratio vs Current Ratio
The main difference between the quick ratio and the current ratio lies in the inclusion of inventory. Here is a table comparing the two ratios:
Quick Ratio | Current Ratio |
---|---|
Formula: (Current Assets - Inventory) / Current Liabilities | Formula: Current Assets / Current Liabilities |
Purpose: Measures the company's ability to meet short-term liabilities with its most liquid assets | Purpose: Measures the company's overall liquidity |
Assets: Includes cash, cash equivalents, marketable investments, and accounts receivable | Assets: Includes all current assets, such as cash, cash equivalents, marketable investments, accounts receivable, and inventory |
Time Sensitivity: More time-sensitive, focusing on assets that can be converted to cash within 90 days | Time Sensitivity: Less time-sensitive, considering assets that can be converted to cash within a year or more |
Both ratios measure a company's short-term liquidity, but the quick ratio is considered more conservative and stricter as it only includes the most liquid assets in its calculation.
Read more:
- Current Ratio vs Acid Test Ratio
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- Current vs Noncurrent Assets
- Current vs Long Term Liabilities
- Balance Sheet vs Trial Balance
- Liquidity vs Solvency
- Balance Sheet vs Cash Flow Statement
- Gross Working Capital vs Net working Capital
- Current Balance vs Available Balance
- Fixed Capital vs Working Capital
- Capital Account vs Current Account
- Comparative vs Ratio Analysis
- Profitability vs Liquidity
- Rate vs Ratio
- QuickBooks vs Quicken
- Balance Sheet vs Consolidated Balance Sheet
- Quick vs Fast
- Proportionate Consolidation vs Equity Method
- ROIC vs ROCE