What is the Difference Between Quick Ratio and Current Ratio?

The main difference between the quick ratio and the current ratio lies in the assets they consider and the time frame they measure. Both ratios are liquidity ratios that measure a company's ability to pay off its short-term liabilities with its short-term assets:

1. Quick Ratio: This ratio is considered more conservative as it only includes highly-liquid assets, such as cash, cash equivalents, and liquid securities, in its calculation. It excludes inventory and prepaid expenses. The quick ratio offers short-term insights, typically about three months. The formula for the quick ratio is:

(Cash + Cash Equivalents + Liquid Securities + Receivables) ÷ Current Liabilities

2. Current Ratio: This ratio includes all current assets in its calculation, such as cash, accounts receivable, and inventory. It offers long-term insights, typically about a year or longer. The formula for the current ratio is:

Current Assets ÷ Current Liabilities

In summary:

• The quick ratio only uses quick assets and excludes any assets that cannot be liquidated and converted into cash within a short time frame.
• The current ratio considers all holdings that can be liquidated and converted into cash within a reasonable time frame.
• The quick ratio excludes inventory from its calculations, while the current ratio includes inventory.
• A 1:1 result is ideal for the quick ratio, while a 2:1 result is ideal for the current ratio.

Comparative Table: Quick Ratio vs Current Ratio

The main difference between the quick ratio and the current ratio lies in the inclusion of inventory. Here is a table comparing the two ratios:

Both ratios measure a company's short-term liquidity, but the quick ratio is considered more conservative and stricter as it only includes the most liquid assets in its calculation.