Current Ratio vs. Quick Ratio (2024)

FAQs

Current Ratio vs. Quick Ratio? ›

Current ratio calculations include all the firm's current assets, while quick ratio calculations only include quick or liquid assets. The quick ratio of a company is considered conservative because it offers short-term insights (about three months), while the current ratio offers long-term insights (a year or longer).

Due to its stricter guidelines, the quick ratio is more conservative. It excludes inventory from the equation. The other major difference between the two is their target ratio. The ideal current ratio is 2:1 or greater, while the ideal quick ratio is 1:1 or greater.

The current ratio is a comparison of a company's current assets to current liabilities that can be used to find its liquidity, usually as a comparison between companies in the same industry. Potential creditors use the current ratio to measure a company's ability to pay off short-term debt. Deeper definition.

On the other hand, a company with a current ratio greater than 1 will likely pay off its current liabilities since it has no short-term liquidity concerns. An excessively high current ratio, above 3, could indicate that the company can pay its existing debts three times.

Key Takeaways

The cash ratio is a liquidity ratio that measures a company's ability to pay off short-term liabilities with highly liquid assets. Compared to the current ratio and the quick ratio, it is a more conservative measure of a company's liquidity position.

Generally speaking, a good quick ratio is anything above 1 or 1:1. A ratio of 1:1 would mean the company has the same amount of liquid assets as current liabilities. A higher ratio indicates the company could pay off current liabilities several times over.

The current ratio includes accounts like inventory and accounts receivable which may be difficult to quickly liquidate or receive (without a discount). The quick ratio only considers highly-liquid assets or cash equivalents as part of current assets, making it a more conservative approach to gauging liquidity.

In general, a current ratio between 1.5 and 3 is considered healthy. Ratios lower than 1 usually indicate liquidity issues, while ratios over 3 can signal poor management of working capital.

If a company calculates its current ratio at or above 3, this means that the company might not be using its assets correctly. This misuse of assets can present its own problems to a company's financial well-being.

A high ratio (greater than 2.0) indicates excessive current assets in the form of inventory, and underemployed capital. A low ratio (less than 1.0) indicates difficulty to meet short-term financial obligations, and the inability to take advantage of opportunities requiring quick cash.

Is a current ratio of 4 good? ›

If your current ratio is low, it means you will have a difficult time paying your immediate debts and liabilities. In general, a current ratio of 2 or higher is considered good, and anything lower than 2 is a cause for concern. However, good current ratios will be different from industry to industry.

The current ratio describes the relationship between a company's assets and liabilities. So, a higher ratio means the company has more assets than liabilities. For example, a current ratio of 4 means the company could technically pay off its current liabilities four times over.

As a general rule, a current ratio below 1.00 could indicate that a company might struggle to meet its short-term obligations, whereas ratios of above 1.00 might indicate a company is able to pay its current debts as they come due.

Solvency ratios measure a company's ability to meet its future debt obligations while remaining profitable. There are four primary solvency ratios, including the interest coverage ratio, the debt-to-asset ratio, the equity ratio and the debt-to-equity ratio.

Generally, 1:1 is treated as an ideal ratio.

If your current ratio is high, it means you have enough cash. The higher the ratio is, the more capable you are of paying off your debts. If your current ratio is low, it means you will have a difficult time paying your immediate debts and liabilities.

In theory, the higher the current ratio, the more capable a company is of paying its obligations because it has a larger proportion of short-term asset value relative to the value of its short-term liabilities.

If a business's quick ratio is less than 1, it means it doesn't have enough quick assets to meet all its short-term obligations. If it suffers an interruption, it may find it difficult to raise the cash to pay its creditors.

In short, a “good” liquidity ratio is anything higher than 1. Having said that, a liquidity ratio of 1 is unlikely to prove that your business is worthy of investment. Generally speaking, creditors and investors will look for an accounting liquidity ratio of around 2 or 3.