If you are a new investor, you must be bombarded with different investment-related phrases already that you have no idea about! However, for investors, it’s imperative to learn and be aware of everything related to investment to make the journey profitable.
Published on 05 April 2022
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One of the most common phrases you may have already heard of is the current and quick ratios. So, what exactly are these two? Is there any difference between current ratio and quick ratio? Before jumping into the details of these two, let us quickly go through a simple definition of the two.
These two terms are used in Accounting and Commerce. And both of them are used for calculating the current assets as a ratio to diverse terms. The quick ratio can be summed up as the ratio between the liquid current assets and liabilities. In contrast, the current ratio is the ratio between current liabilities and current assets. Also Read: Top 10 Stock Trading Terms You Should Know
Current Ratio vs Quick Ratio
The major difference between current and quick ratio is that the former is the ratio between current liabilities and assets, and the latter is the ratio between current liabilities and the nearest cash present.
Current Ratio
This is a liquidity ratio that’s used in commerce by investors for determining whether a business is capable of paying off its existing liabilities with the help of its current assets or not. Basically, all the short-term liabilities of an organisation payable within one financial year come under the tag of ‘current liabilities.’ On the other hand, all the company's short-term assets that the company can convert to cash in a year come under ‘current assets.’
So, what’s the formula for calculating the current ratio? It’s simple –
Current ratio = current assets ÷ current liabilities
Usually, the current ratio of a business has to be more than 1. If it’s less than 1, it would mean that the business is devoid of the necessary assets to pay out all its liabilities if they are ever short of funds.
Quick Ratio
Alternately, the quick ratio is typically used by the investors to find out the efficiency of a company at paying off its current liabilities with its current assets. Although it may look similar to the current ratio, the fact is, the quick ratio is a traditional way of calculation as it takes into account only the current assets of a company that is liable to be liquidated in less than two months (or 90 days). The quick ratio is often termed the acid-test ratio for companies.
Here is the formula to calculate the quick ratio –
Quick ratio = (cash equivalents + cash + current receivables + short-term investments) ÷ current liabilities
Generally, a company’s quick ratio has to be more than 1. If it is less than 1, it would mean that the company isn’t capable enough to meet its liabilities in case of an adverse situation.
Difference Between Current Ratio Versus Quick Ratio
Now that you are aware of both the ratios, here is a simple differentiating chart that can make you better understand the difference between the two –
Current Ratio
Quick Ratio
Definition
It is defined as the ratio for calculating the share between the current assets as well as the current liabilities of a company.
It is defined as the ratio that is used in calculating the proportion of current assets and current liabilities that are most liquid.
Purpose
It is used for finding the capability of the company to meet its current obligations.
It is used for defining the ability of a company to meet any urgent requirement.
Also Termed As
Working capital ratio
Acid-test ratio
Inclusions
All the current assets of a business like its inventories, cash equivalents, total cash, prepaid expenses, and so on.
Includes only the most liquid current asset of a company which can be cash and cash equivalents.
Preferred Number
The current ratio of 2:1 is preferable. However, ideally, it should be anything more than 1.
A quick ratio of 1:1 is preferable.
Conclusion
So, now you should be aware of the exact difference between current ratio and quick ratio, isn’t it? Although both of them may seem equal at first glance, they greatly differ from one another. That being said, as an investor, you should make use of both these ratios together to find out the level of liquidity of a business’s possessions for experiencing more profit in your investments and market dealings.
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It is the ratio used to calculate the proportion between the current liabilities and current assets of a company.
It is the ratio used to calculate the proportion of the current assets and current liabilities of a company.
The formula for calculating the current ratio is –
Current ratio = current assets ÷ current liabilities
The formula for calculating the quick ratio is –
Quick ratio = (cash equivalents + cash + current receivables + short-term investments) ÷ current liabilities
The quick ratio is also termed as an acid-test ratio because it is used for determining whether a business has enough liquid assets capable of being instantly converted into cash to meet its short-term dues or not. Basically, this test determines the efficiency of a business for the investors.
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It is the ratio used to calculate the proportion between the current liabilities and current assets of a company.
It is the ratio used to calculate the proportion of the current assets and current liabilities of a company.
The formula for calculating the current ratio is –
Current ratio = current assets ÷ current liabilities
The formula for calculating the quick ratio is –
Quick ratio = (cash equivalents + cash + current receivables + short-term investments) ÷ current liabilities
The quick ratio is also termed as an acid-test ratio because it is used for determining whether a business has enough liquid assets capable of being instantly converted into cash to meet its short-term dues or not. Basically, this test determines the efficiency of a business for the investors.
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