Current Ratio vs Quick Ratio: Comparing Two Key Liquidity Ratios

What is the Current Ratio vs Quick Ratio? Definitions and Importance

Current ratio and quick ratio are two key liquidity ratios that provide complementary perspectives on a company’s short-term financial health. Both ratios assess a company’s short-term cash position and its ability to handle immediate financial needs and obligations. 

Liquidity ratios, such as the current and quick ratios, assess a company’s ability to convert assets into cash quickly and cost-effectively. These ratios help analysts, investors, and company leadership understand whether a business can meet its short-term obligations without disrupting operations.

The difference between the current ratio and quick ratio lies in what liquid assets are included in each ratio’s calculation and how each ratio is interpreted.

What is the Current Ratio?

The current ratio, also known as the working capital ratio, measures a business’s ability to meet its short-term obligations that are due within a year. This ratio compares total current assets to total current liabilities. It also looks at how a company can maximize the liquidity of its current assets to settle its liabilities and debt obligations.

The current ratio is calculated by dividing total current assets by total current liabilities:

Current Ratio = Current Assets ÷ Current Liabilities

What is the Quick Ratio?

The quick ratio, also known as the Acid Test Ratio, measures the ability of a business to pay its short-term liabilities. But unlike the current ratio, the quick ratio limits assets to cash or other assets that a company can swiftly convert into cash. Therefore, the quick ratio excludes accounts like inventory and prepaid expenses.

The quick ratio is usually calculated by subtracting inventory from the total current assets and dividing the result by total current liabilities:

Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities

What are the Differences Between the Current Ratio and the Quick Ratio?

The current ratio is more comprehensive than the quick ratio, as it includes all current assets from the balance sheet — cash, marketable securities, accounts receivable, and inventory. 

Another way to understand the difference is that a quick ratio only looks at the most liquid assets, which is a stricter assessment of a company’s immediate liquidity. For example, inventory is a company asset that relies on sales to generate cash. Depending on sales cycles, it may take time for inventory to sell, i.e., convert into cash, thus making it less “quick” than other current assets. 

Current Ratio Formula and Calculation

Suppose you’re analyzing a company that holds the following assets and liabilities on its balance sheet: 

Assets

• Cash = $15 million
• Marketable securities = $20 million
• Inventory = $25 million

Liabilities

• Short-term debt = $15 million
• Accounts payables = $15 million

Using the current ratio formula (Current Ratio = Current Assets ÷ Current Liabilities), you perform the following calculation: 

1. Current assets = 15 + 20 + 25 = $60 million
2. Current liabilities = 15 + 15 = $30 million
3. Current ratio = $60 million / $30 million = 2.0 (or expressed as a multiple as 2x)

Typically, a current ratio greater than 1.0 suggests financial well-being for a company.  A current ratio of 2.0 means that the company could pay off its current liabilities twice with its current assets. 

Quick Ratio Formula and Calculation

Now suppose you want to assess the same company’s liquidity position with a more conservative measurement — the quick ratio. 

In contrast with the current ratio, the Quick Ratio excludes inventory from current assets before dividing by current liabilities:

Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities

You calculate the company’s current ratio as follows:

1. Current Assets – Inventory = 60 – 25 = $35 million
2. Current liabilities = $30 million
3. Quick ratio = $35 million / $30 million = 1.17 (or expressed as a multiple as 1.17x)

The quick ratio of 1.17 indicates the company can pay off its current liabilities 1.17 times using only its most liquid assets, without relying on inventory sales. 

For an even more conservative liquidity ratio, analysts sometimes subtract prepaid expenses, or future expenses paid in advance, as well as inventory from current assets. To calculate a quick ratio with this approach, use the following formula:

Quick Ratio = [Current Assets – Inventory – Prepaid Expenses] ÷ Current Liabilities

How to Interpret the Current Ratio vs. Quick Ratio

What the Current Ratio Reveals

A strong current ratio signals flexibility. It shows the company has enough accessible resources to cover near-term financial obligations — and maybe even some breathing room. But too much of a cushion can raise questions about underutilized capital.

• A current ratio above 1.0 means the company holds more current assets than current liabilities.
• A ratio of 2.0 suggests it could pay off its short-term liabilities twice over.
• Analysts often consider a range between 1.5 and 3.0 healthy, but that depends on the business:
  • Retailers may operate well with ratios around 0.90, thanks to quick inventory turnover.
  • Manufacturers tend to target higher ratios due to slower-moving inventory.
• A very high ratio can sometimes signal inefficiency, such as cash sitting idle instead of being reinvested for growth.

What the Quick Ratio Reveals

The quick ratio helps you gauge how easily a company could respond to immediate financial pressure — without relying on inventory or other assets that take time to liquidate. It’s a more conservative read on liquidity, especially useful when speed matters.

• A quick ratio above 1.0 typically indicates that the company can meet short-term obligations using its most liquid assets.
• The sweet spot for many businesses falls between 1.0 and 1.5, though expectations vary by industry:
  • Retailers may function well with ratios as low as 0.30, given predictable cash inflows.
• A ratio below 1.0 could mean the company is vulnerable if sales slow down or credit tightens.
• On the other hand, a very high quick ratio might indicate excess liquidity that could be put to better use.

Comparing Results Across Both Ratios

Looking at both ratios side by side helps you understand how much the company depends on inventory to stay liquid.

• A wide gap between the two often signals heavy reliance on inventory. For instance, a current ratio of 2.0 and a quick ratio of 0.7 suggest that inventory makes up a large portion of current assets.
• That might be perfectly reasonable for a retail business — but it could raise red flags in sectors like tech, where inventory can become obsolete quickly.

Bottom line: Neither ratio tells the full story on its own. Use them together to spot patterns, assess risk, and benchmark against industry norms. That’s how you turn numbers into insight.

Current Ratio vs Quick Ratio: Which Should You Use for Your Financial Analysis?

When it comes to the current ratio and quick ratio, both measures provide essential perspectives on a company’s liquidity position. Rather than choosing between them, use both ratios as complementary measures that provide a fuller picture. Track these two ratios over time to identify trends and always compare them against industry benchmarks for meaningful context.

Financial ratio analysis, including these liquidity metrics, is covered in depth in CFI’s Financial Analysis Fundamentals course, a core requirement in the FMVA® certification program. 

CFI’s Financial Modeling & Valuation Analyst (FMVA®) certification is one of the most recognized programs for learning financial modeling skills. It’s designed for professionals pursuing careers in investment banking, equity research, FP&A, corporate finance, and related fields. ​​Over 75% of CFI learners report significant career advancement within months of program completion.

The FMVA program provides the structured path and hands-on training you need to build real-world modeling skills and apply them with confidence in any corporate finance environment.

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Additional Resources

Financial Ratios Definitive Guide

ROA vs. ROE: Differences, Formulas, and Uses in Financial Analysis

Negative Working Capital: Strength or a Warning Sign?

Essential Guide to Accounting for Financial Analysts

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