# Current Ratio vs Quick Ratio

Current ratio includes all current assets such as inventory, prepaid expenses, etc., the quick ratio specifically focuses on assets that can be readily converted into cash.
Current Ratio vs Quick Ratio
3 min
29-August-2024
The Current Ratio and Quick Ratio are essential financial metrics used to assess a company's liquidity and short-term financial health. The Current Ratio measures a company's ability to pay off its short-term liabilities with its short-term assets, indicating overall liquidity. In contrast, the Quick Ratio, also known as the Acid-Test Ratio, provides a more stringent assessment by excluding inventory from current assets, focusing on the company's ability to meet its immediate obligations without relying on inventory sales. Both ratios offer valuable insights, but the Quick Ratio is particularly useful for industries where inventory might not be easily converted to cash.

In this article we will talk about the difference between current ratio and quick ratio and try to understand both the ratios.

## What is Current Ratio?

The Current Ratio is a financial metric that evaluates a company's ability to cover its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities. In India, businesses and analysts frequently use this ratio to gauge a firm's liquidity. A higher current ratio indicates that a company has more than enough assets to pay off its short-term debts, which is a sign of good financial health. For instance, a current ratio of 2 means the company has twice the amount of assets compared to its liabilities.

## What is Quick Ratio?

The Quick Ratio, also known as the Acid-Test Ratio, is a stringent measure of a company’s short-term liquidity. It assesses a company's ability to meet its immediate liabilities without relying on the sale of inventory. The Quick Ratio is calculated by subtracting inventories from current assets and then dividing by current liabilities. This ratio is particularly important for companies in India where inventory may not be quickly converted into cash, such as in manufacturing sectors. By focusing on more liquid assets like cash, marketable securities, and receivables, the Quick Ratio provides a clearer picture of a company's ability to cover its short-term debts swiftly. Resources like NSE India and BSE India offer detailed financial metrics, including Quick Ratios, for listed companies.

## Difference between Quick Ratio and Current Ratio

While both the Current Ratio and Quick Ratio measure a company’s short-term financial health, they differ in their calculation and the type of liquidity they assess. The Current Ratio includes all current assets, whereas the Quick Ratio excludes inventory, providing a more conservative view of a company's liquidity. Here's a comparison which explains the difference between quick ratio and current ratio in simple words:

 Aspect Current Ratio Quick Ratio Calculation Current Assets / Current Liabilities (Current Assets - Inventory) / Current Liabilities Focus Overall short-term liquidity Immediate liquidity without relying on inventory Usefulness General assessment of liquidity More stringent assessment, useful in industries where inventory turnover is slow Indicator of Broad financial health Ability to quickly cover short-term liabilities

## Calculation of current ratio and quick ratio

To calculate these ratios, you need data from a company's balance sheet.

• Current ratio calculation:
Current Ratio = Current Assets / Current Liabilities

• Quick ratio calculation:
Quick Ratio = Current Assets − Inventory Current / Liabilities

For example, if a company has current assets of Rs. 1,00,000 and current liabilities of Rs. 50,000, the Current Ratio would be:

Current Ratio = 1,00,000 / 50,000 = 2

If the inventory is Rs. 20,000, the Quick Ratio would be:

Quick Ratio = 1,00,000 − 20,000 / 50,000= 80,000 / 50,000 = 1.6

## Current ratio vs quick ratio - When to use?

The choice between using the Current Ratio or Quick Ratio depends on the context and the industry in which the company operates.

• Current ratio: Best used for a general assessment of a company's ability to meet short-term obligations. It is particularly useful in industries where inventory can be easily converted into cash, such as retail.
• Quick ratio: More appropriate in industries where inventory turnover is slow or where inventory cannot be quickly liquidated. This ratio provides a more conservative measure of liquidity and is valuable for manufacturing or heavy industry sectors in India.
Both ratios together provide a comprehensive picture of a company's liquidity position, helping stakeholders make informed decisions about financial health and risk management.

## Scenarios and purposes for quick ratio and current ratio

The Quick Ratio and Current Ratio are crucial for different scenarios and purposes. The Current Ratio is ideal for general assessments of a company's ability to cover short-term liabilities, particularly in industries where inventory is quickly liquidated, such as retail or consumer goods. It helps stakeholders understand the overall liquidity of a company. On the other hand, the Quick Ratio is more useful in scenarios where a conservative view of liquidity is needed, such as in manufacturing or heavy industries where inventory turnover is slow. It provides insight into a company’s ability to meet immediate obligations without relying on inventory sales. Financial analysts, creditors, and investors use these ratios to assess the financial health and risk level of businesses in different contexts.

## What is included in the Current Ratio?

The Current Ratio includes all current assets and current liabilities from a company's balance sheet. Current assets are those that can be converted into cash within a year and typically include cash and cash equivalents, accounts receivable, inventory, and marketable securities. Current liabilities are obligations that are due within a year and usually include accounts payable, short-term debt, accrued liabilities, and other short-term financial obligations. By comparing these two figures, the Current Ratio provides a snapshot of a company's ability to pay its short-term debts with its short-term assets.

## What is included in the Quick Ratio?

The Quick Ratio, or Acid-Test Ratio, includes current assets minus inventory, divided by current liabilities. This ratio focuses on the most liquid assets that can be quickly converted into cash. Included in the Quick Ratio calculation are cash and cash equivalents, marketable securities, and accounts receivable. Inventory is excluded because it may not be quickly liquidated into cash. Current liabilities remain the same as in the Current Ratio and include short-term debts and obligations due within a year. This ratio provides a stringent measure of a company's immediate liquidity.

## What is a good current ratio for a company?

A good Current Ratio typically ranges between 1.5 and 3, indicating that a company has 1.5 to 3 times more current assets than current liabilities. This range suggests that the company has a healthy liquidity position, with enough assets to cover its short-term obligations. However, the ideal ratio can vary depending on the industry. For instance, companies in industries with high inventory turnover, such as retail, might have a lower acceptable Current Ratio, while capital-intensive industries might aim for a higher ratio.

## What is a good quick ratio for a company?

A good Quick Ratio is generally around 1 or higher, indicating that a company has enough liquid assets to cover its short-term liabilities without relying on the sale of inventory. A Quick Ratio below 1 may suggest liquidity issues, while a significantly higher ratio can indicate a strong liquidity position. This ratio is particularly critical for industries where inventory may not be easily converted to cash. Analysts and investors often use the Quick Ratio to assess a company’s financial stability and its ability to handle short-term liabilities, especially in more volatile economic environments.

## Who reviews quick and current ratio?

• Financial analysts: Regularly review these ratios to assess company performance.
• Investors: Use these ratios to make informed investment decisions.
• Creditors: Evaluate these ratios to determine a company's creditworthiness.
• Company management: Monitors these ratios to ensure healthy liquidity levels.
• Auditors: Review these ratios during financial audits to assess financial health.
• Regulators: May analyse these ratios to ensure financial stability and compliance with regulations.
For deeper insights, here are additional articles that are closely aligned with your interests:

## Limitations of current ratio and quick ratio

While the Current Ratio and Quick Ratio are valuable tools for assessing liquidity, they have limitations. The Current Ratio includes inventory, which may not be easily converted to cash, potentially overstating liquidity in industries with slow inventory turnover. The Quick Ratio, though more stringent, might overlook the role of inventory in industries where it can be quickly sold. Both ratios are static measures, capturing only a snapshot in time and not accounting for future cash flows or seasonal fluctuations. They also do not consider the quality of receivables or the timing of liabilities, which can impact liquidity assessments. Consequently, these ratios should be used in conjunction with other financial metrics for a comprehensive analysis of a company's financial health.

## Key Takeaways

• The quick and current ratios are liquidity metrics that help investors and analysts assess a company's ability to meet its short-term obligations.
• The quick ratio divides cash and cash equivalents by current liabilities.
• The quick ratio focuses on the most liquid assets, making it a more conservative measure of liquidity.
• The current ratio divides current assets by current liabilities.
• The current ratio includes inventory and accounts receivable, which may not be quickly converted to cash or collected without a discount.
The Current Ratio and Quick Ratio are vital financial metrics used to evaluate a company's liquidity and its ability to meet short-term obligations. The Current Ratio assesses a company's overall liquidity by comparing its current assets to current liabilities, including inventory. In contrast, the Quick Ratio provides a more stringent measure by excluding inventory from current assets, offering a clearer view of a company's ability to cover immediate liabilities.

Both ratios are reviewed by financial analysts, investors, creditors, company management, auditors, and regulators to assess a company's financial health. However, they have limitations, such as not accounting for future cash flows or the quality of receivables. Therefore, they should be used alongside other financial metrics for a comprehensive analysis.

The Bajaj Finserv Mutual Fund Platform is designed to provide investors with a wide range of mutual fund options, promoting financial growth and stability. With over 1000+ mutual fund schemes listed on the Bajaj Finserv Platform, investors have access to diverse investment opportunities to suit various financial goals where they can also compare mutual funds. The platform ensures a user-friendly experience, enabling easy navigation and selection of mutual funds. By leveraging the extensive resources available on the Bajaj Finserv Platform along with the mutual fund calculator, investors can make informed decisions and efficiently manage their portfolios. This comprehensive platform supports financial planning and investment management, catering to the diverse needs of its users.

## Essential tools for all mutual fund investors

 Lumpsum Calculator Step Up SIP Calculator Systematic Investment Plan Calculator Canara Robeco SIP Calculator SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator Axis Bank SIP Calculator

Which is better current ratio or quick ratio?
The quick ratio is generally better for a conservative view of liquidity since it excludes inventory, focusing on the most liquid assets. However, the current ratio is useful for a broader view, especially in industries where inventory is easily converted to cash. Both ratios are helpful but serve different purposes depending on the context.

What will happen if quick ratio is greater than current ratio?
If the quick ratio is greater than the current ratio, it indicates that the company has a high level of liquid assets compared to its short-term liabilities. This scenario suggests that the company does not rely heavily on inventory or prepaid assets to meet its short-term obligations, reflecting strong liquidity.

What does quick ratio tell you?
The quick ratio, also known as the acid-test ratio, measures a company's ability to pay off its current liabilities without relying on the sale of inventory. It provides insight into a company's short-term liquidity position by focusing on the most liquid assets, indicating the company's capability to meet impending debts.

What is a good current ratio?
A good current ratio typically ranges between 1.5 and 3. This range indicates that a company has 1.5 to 3 times more current assets than current liabilities, suggesting a healthy liquidity position. The ideal ratio can vary depending on the industry and specific business circumstances.

How to improve current ratio?
To improve the current ratio, a company can increase current assets or decrease current liabilities. Strategies include boosting sales, collecting receivables faster, reducing short-term debt, managing inventory efficiently, and improving overall cash flow management. Enhancing profitability and securing long-term financing can also help improve the current ratio.

What is another name for current ratio?
Another name for the current ratio is the ‘working capital ratio.’ This ratio measures a company's ability to cover its short-term obligations with its short-term assets. It is a key indicator of a company's operational efficiency and short-term financial health.

What is the main 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 all current assets, while the quick ratio excludes inventory. The quick ratio provides a more stringent measure of liquidity by focusing only on the most liquid assets, offering a more conservative view of a company's ability to meet short-term obligations.

What is an example of a quick ratio?
An example of a quick ratio calculation is as follows: if a company has Rs. 50,000 in cash, Rs. 30,000 in accounts receivable, and Rs. 20,000 in marketable securities, with Rs. 100,000 in current liabilities, the quick ratio would be (50,000 + 30,000 + 20,000) / 100,000 = 1.0. This indicates that the company has enough liquid assets to cover its short-term liabilities.

What is an example of a current ratio?
An example of a current ratio calculation is as follows: if a company has Rs. 150,000 in current assets, including cash, receivables, and inventory, and Rs. 100,000 in current liabilities, the current ratio would be 150,000 / 100,000 = 1.5. This indicates that the company has 1.5 times more current assets than current liabilities.

What is the formula for current ratio and quick ratio?
The formula for the current ratio is: Current Ratio = Current Assets / Current Liabilities

The formula for the quick ratio is: Quick Ratio = Current Assets − Inventory / Current Liabilities

## Bajaj Finserv App for All Your Financial Needs and Goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

• Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
• Explore and apply for co-branded credit cards online.
• Invest in fixed deposits and mutual funds on the app.
• Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
• Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
• Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.
• Shop from over 100+ brand partners that offer a diverse range of products and services.
• Use specialised tools like EMI calculators, SIP Calculators
• Check your credit score, download loan statements and even get quick customer support—all on the app.
Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

## Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

## Disclaimer:

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

This information should not be relied upon as the sole basis for any investment decisions.Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Show All Text

## Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.

Show All Text