Current Ratio vs Quick Ratio: Measuring Liquidity

Liquidity ratios answer a simple survival question: can the company pay what it owes in the near term? The current ratio and the quick ratio are the two most common.

Current ratio

Current ratio = current assets ÷ current liabilities. It compares everything the company can turn into cash within a year against everything it owes within a year. A ratio above 1 means current assets exceed current liabilities; below 1 can signal a cash crunch, though it's normal in some fast-turnover businesses.

Quick ratio (acid test)

Quick ratio = (current assets − inventory) ÷ current liabilities. It strips out inventory, which can be slow or hard to sell, for a stricter test of immediate liquidity. A healthy quick ratio near or above 1 means the company can cover short-term dues without relying on selling stock.

Reading them together

A big gap between the current and quick ratios means a lot of the company's short-term assets are tied up in inventory — worth noting for a business where inventory can go stale. As always, compare against sector norms. These come from the balance-sheet items; see how to read a balance sheet.