Quick Ratio vs. Current Ratio: An Overview

Both the quick ratio and current ratio measure a company’s short-term liquidity, or its ability to generate enough cash to pay off all debts should they become due at once. Although they’re both measures of a company’s financial health, they’re slightly different. The quick ratio is considered more conservative than the current ratio because its calculation factors in fewer item⛎s.

Here’s a loo💞k at both ratios, how to cal🔯culate them, and their key differences.

Quick Ratio

The 澳洲幸运5开奖号码历史查询:quick ratio measures the liquidity of a company by measuring how well its 澳洲幸运5开奖号码历史查询:current assets could cover its current liabilities. Curr𝓀ent assets on a company’s balance sheet represent the value of all assets that can reasonably be converted ℱinto cash within one year.

The quick ratio is a more conservative measure of liquidity than the current ratio, because it doesn’t include all of the items used in the current ratio. The quick ratio, often referred to as the 澳洲幸运5开奖号码历史查询:acid-test ratio, includes only 澳洲幸运5开﷽奖号码历史查询:asset﷽s that can be converted to cash within 90 days or less.

Current assets used in the quick ratio include:

• 澳洲幸运5开奖号码历史查询:Cash and cash equivalents
• 澳洲幸运5开奖号码历史查询:Marketable securities
• 澳洲幸运5开奖号码历史查询:Accounts receivable

澳洲幸运5开奖号码历史查询:Current liabilities are the company’s debts or obligations on its 🉐balance sheet that are due within 𓄧one year. Examples of current liabilities include:

• 澳洲幸运5开奖号码历史查询:Short-term debt
• 澳洲幸运5开奖号码历史查询:Accounts payable
• 澳洲幸运5开奖号码历史查询:Accrued liabilities and other debts

Quick Ratio Formula

The quick ratio is calculated by adding cash and e⛎quivalents, marketable investments, and accounts receivable, and dividing that sum by current liabilities as shown in th♊e formula below:

$\begin{aligned} \text{Quick Ratio}= \frac{ \begin{array}{c} \text{Cash}+\text{Cash Equivalents }+\\ \text{Current Receivables}+\text{Short-Term Investments} \end{array} }{\text{Current Liabilities}} \end{aligned}$Quick Ratio=Current LiabilitiesCash+Cash Equivalents +Current Receivables+Short-Term Investments​​​

If a company’s financials don’t provide a breakdown of its quic𓃲k assets, you can still calculate the quick ratio. You can subtract꧅ inventory and current prepaid assets from current assets, and divide that difference by current liabilities.

A company that has a quick ratio of more than one is usually considered less of a financial risk than a company that has a quick ratio of less than one.

Current Ratio

The current ratio measures a company’s ability to💟 pay current, or short-term, liabilities (debt and payables) with its current, or short-term, assets (cash, inventory, and receivables).

Examples of a company’s current assets include:

• Cash and cash equivalents
• Marketable securities
• Accounts receivable
• 澳洲幸运5开奖号码历史查询:Prepaid expenses
• 澳洲幸运5开奖号码历史查询:Inventory

Current liabilities used in the current r♈atio are the same as the ones used in the quick ratio:

• Short-term debt
• Accounts payable
• Accrued liabilities and other debts

Current Ratio Formula

You can calculate the current ratio of a company by dividing its ♉current assets by current liabilities, as shown in the formula below:

$\text{Current Ratio}= \frac{\text{Current Assets}}{\text{Current Liabilities}}$Current Ratio=Current LiabilitiesCurrent Assets​

If a company has a current ratio of less than one, it has fewer current assets than current liabilities. 澳洲幸运5开奖号码历史查询:Creditors would consider the company a financial risk because it might not be able to easily pay down its short-term obligations. If a company has a current ratio of more than one, it is considered less of a risk because it could 澳洲幸运5开奖号码历史查询:liquidate i𓆉ts current assets more easily to pay down short-term liabil🐬ities.

Key Differences

The quick ratio offers a more conservative view of a company’s liquidity or ability to meet its short-term liabilities with its short-term assets because it doesn’t include inventory and other current assets that are more difficult to liquidate (i.e., turn into cash). By excluding inventory, and other less liquid assets, the quick ratio focuses on the company’s more liquid🥂 assets.

Both ratios include ac🌳counts receivable, but some receivables might not be able to be liquidated very quickly. As a result, even the quick ratio may not give an accurate representation of liquidity ಌif the receivables are not easily collected and converted to cash.

ꦿ♈When Should You Use the Quick Ratio or the Current Ratio?

The quick ratio is a more appropriate metric to use when working or analyzing a shorter time frame. Consider a company with $1 million of current assets, 85% of which is tied up in inventory. If the company has 30 days to liquidate its assets to p🐼ay material current liabilities, the company may have to discount inventory to sell it, deteriorating its financial position and overstating its liquidity should the current ratio have been used.

🎃The quick ratio may also be more appropriate for industries where inventory faces obsolescence. In fast-moving industries, a company’s warehouse of goods may quickly lose demand with consumers. In these cases, the company may not have had the chance to reduce the value of its inventory via a write-off, overstating what it thinks it may receive due to outdated market expectations.

The current ratio is better in a few different scenarios. Most often, companies may not face imminent capital constraints,🎃 or they may be able to raise investment funds to meet certain requirements without having to tap operational funds. Therefore, the current ratio may more reasonably demonstrate what resources are available over the subsequent year compared to the upcoming 12 months of liabilities.

The current ratio may also be easier to calculate based on the format of the balance sheet presented. Less formal reports (i.e., not required by GAAP external reporting rules) ma𒅌y simply report current assets without further breaking down🎉 balances. In these situations, it may not be possible to calculate the quick ratio.

Special Considerations

Since the current ratio includes invent🥀ory, it will be high for companies that are heavily involved in selling inventory. For example, in the retail industry, a store might stock up on merchandise leading up to the holidays, boosting its current ratio. However, when the season is over, the current ratio would come down substantially. As a result, the current ratio would fluctuate throughout the year for retailers and similar types of companies.

On the other hand, removing inventory might not reflect an accurate picture of liquidity for some industries. For example, supermarkets move inventory very quickly, and their stock would likely represent a large﷽ portion of their current assets. To strip out inventory for supermarkets would make their current liabilities🧔 look inflated relative to their current assets under the quick ratio.

Real-Wo𝐆rld Example💞 of Current Ratio and Quick Ratio

Consider the January 31, 2022 balance sheet for Walmart Inc., shown below as part of its 2022 annual report. Relevant information for analysis includes:

• Cash and cash equivalents: $14,760 (2022), $17,741 (2021)
• Receivables (net): $8,280 (2022), $6,516 (2021)
• Total current assets: $81,070 (2022), $90,067 (2021)
• Total current liabilities: $87,379 (2022), $92,645 (2021)

Based on the figures called out above, Walmart’s current ratios and quick ratios for 2021 and 2022 (for the reporti🅘ng period as of the balance sheet above) were:

• Current ratio (2022): $81,070 ÷ $87,379 = 0.928
• Current ratio (2021): $90,067 ÷ $92,645 = 0.972
• Quick ratio (2022): $14,760 + $8,280 ÷ $87,379 = 0.264
• Quick ratio (2021): $17,741 + $6,516 ÷ $92,645 = 0.262

From this information, a few conclusions can be drawn. Walmart’s short-term liquidity worsened from 2021 to 2022, tܫhough it appears to have almost enough current assets to pay off current debts. A wide majority of current as🐠sets are not tied up in cash, as the quick ratio is substantially less than the current ratio. In addition, though its quick ratio only dropped a little, there are bigger changes in cash on hand vs. the balances in accounts receivable.

The Bottom Line

When analyzing a comp♔any’s liquidity, no single ratio will suffice in every circumstance. It’s important to include other financial ratios in your analysis, including both the current ratio and the quick ratio, as well as others. More importantly, it’s critical to understand what areas of💯 a company’s financials the ratios are excluding or including to understand what the ratio is telling you.

Correction—April 30, 2023: An earlier version of this article contained an arithmetic error in the calculation of Walmart’s quick ratio for 2021. It has been corrected to show that the quick ratio for that year was 0.262.