Current & Quick Ratios
Two quick tests of whether near-term bills can be paid without panic.
These two ratios test short-term survival: can the company pay the bills due within a year using the assets it can quickly turn to cash?
Current ratio = Current assets ÷ Current liabilities; Quick ratio = (Current assets − Inventory) ÷ Current liabilities
Quick ratio is the stricter test — it excludes inventory, which can be hard to sell fast.
A current ratioShort-term assets versus short-term liabilities. above 1 means short-term assets exceed short-term bills — the company isn’t about to face a cash crunch. The quick ratio is the paranoid version that ignores inventory (because unsold stock is the slowest current asset to convert). If the quick ratio is healthy, near-term liquidityHow easily an asset can be bought or sold without moving its price. is genuinely solid.
Common mistakeAssuming a very HIGH current ratioShort-term assets versus short-term liabilities. is always great. An unusually high ratio can mean idle cash or piles of unsold inventory/uncollected receivables — capital sitting around instead of working. Healthy, not bloated, is the goal.
Key takeawayCurrent and quick ratios test whether near-term assets cover near-term bills (quick ratio excludes inventory). Above ~1 is reassuring; extremely high can signal idle capital.
FAQs
Why exclude inventory in the quick ratio?
Because inventory is the least liquid current asset — in a crunch it may not sell quickly, or only at a discount. The quick ratio asks the stricter question: can the company pay its bills without relying on selling stock?