The current ratio and quick ratio are used in Commerce and Accounting. Both are the terms used to calculate current assets as a ratio to different terms. The current ratio is the ratio between current assets and current liabilities. The quick ratio is the ratio between the most liquid current assets and the current liabilities.
Current Ratio vs Quick Ratio
The main difference between the Current ratio and Quick ratio is that the current ratio is the ratio between current assets and current liabilities whereas the quick ratio is the ratio between the nearest cash available and current liabilities.
Current ratio is the proportion between current assets and current liabilities. By calculating the current ratio of a company, its financial status is identified. The capacity of a firm to meet its requirement can be found. For impressing creditors, a high current ratio is recommended for a firm.
The quick ratio is also called an acid-test ratio. It is the proportion of most liquid current assets to the current liabilities. Most liquid current assets mean the cash which is readily available for a firm, when any circumstance occurs. A company which has a quick ratio of less than 1 cannot pay its debts back.
Comparison Table Between Current Ratio and Quick Ratio (in Tabular Form)
| Parameter of Comparison | Current ratio | Quick ratio |
|---|---|---|
| Definition | The current ratio is the ratio between whatever current assets a person holds to the current liabilities he/she has. | The quick ratio is the ratio between the assets that can be converted to liquid cash, to the current liabilities. |
| Benefits | Current ratio calculates the ratio of all the assets and the liabilities; hence this cannot be depended upon when a sudden crisis occurs. | Quick ratio calculates the ratio between readily liquefiable assets and current liabilities; hence this cash can be a source to repay debts. |
| Efficiency | From the calculated current ratio, a company’s ability to solve short term liabilities is calculated. | By calculating the quick ratio, a company’s efficiency to overcome its present financial liabilities is calculated. |
| Ideal ratio | 2:1 | 3:1 |
| Example | If a company has assets of $10000 and liabilities of $5000 Current ratio = $10000/$5000 = 2:1 | If the company has $2500 of inventory and supplies, then Quick ratio = 3:2 |
What is Current Ratio?
A current ratio is the liquidity ratio from which the ability of a company to repay its short-term debts is calculated. The comparison between the current assets and the current liabilities gives this ratio. The preferred ratio is 2:1, which is twice the amount of assets than the liabilities.
When creditors try to invest in a company, they would prefer one with a higher current ratio since it explains the ability of the firm to repay the credit. But having a very large ratio is not encouraged as this shows that the firm is not using its assets in the best way, and the investors won’t be able to have high returns.
If the current ratio falls below 1, it indicates that the current liabilities are more than that of the assets. Hence it is not safe to invest in the company. Some companies which have inventory stocks can operate with a ratio below 1. This is because of the confidence in them to repay the debts once the inventories bring sale.
By analyzing the history of current ratios in many financial years, a company’s growth can be identified. It can also explain the different ways a creditor can expect his/her higher returns from the company. The efficient firms usually have a ratio above 1 so that investors can have faith in them.
What is Quick Ratio?
Quick ratio is the ability of a firm to liquefy its assets as soon as possible and repay the debts. It is the ratio between the nearest liquefiable assets to the current liabilities. The preferred ratio is 1:1, it explains the ability of repaying the recent debts.
Quick ratio considers the assets which can be converted into liquid cash. This is more specific, since many assets cannot be valued when a sudden financial crisis arrives. When such situations occur, the amount that a company can invest is identified from a quick ratio. A company with a quick ratio of less than 1 cannot pay back debts completely.
The quick ratio is also called an acid-test ratio. This is because of the quicker results obtained from this test. The quick ratio also considers the assets that can be quickly liquefied. This is the reason why a quick ratio is considered as a more conservative measure than the current ratio. The higher the quick ratio a firm has, the more capacity it has to repay the debts.
The targets assigned by the company should be attained by the laborers to have a better quick ratio. If the amount to be invested in the company is delayed because of any situation, it affects the quick ratio and the company would be unable to meet its recent debts.
Main Differences Between Current Ratio and Quick Ratio
- The current ratio is the ratio between the current assets and current liabilities. The quick ratio is the ratio between near-cash assets and current liabilities.
- Since the current ratio calculates both liquefiable and in- liquefiable assets, it cannot be trusted when a sudden need occurs. Quick ratio uses the liquefiable assets to calculate the ratio and hence it can be used to repay sudden debts.
- The current ratio is the ability of a company to repay its short-term debts whereas a quick ratio is the ability to repay a company’s present liabilities.
- The ideal current ratio is 2:1 whereas the idea; quick ratio is 1:1.
- The current ratio is the amount that can be used in the long-term and quick ratio is the amount that can be used at any moment.
Conclusion
Both current ratio and quick ratio are the terms used to calculate the liquidity of a company’s assets. The current ratio is the proportion between the current assets and current liabilities. It is used to identify a company’s growth and its efficiency in using its credits. The ideal ratio is 2:1 for the investors to invest in the company.
The quick ratio is the ratio between near-cash assets to the current liabilities. From this calculation the ability of a company to repay its recent debts is identified. For a company to run smoothly, the quick ratio has to be 1:1. For ratios below 1, the debts are more than the assets. Hence creditors find it difficult to invest in them.
References
- https://repository.widyatama.ac.id/xmlui/handle/123456789/7717
- https://journal.trunojoyo.ac.id/kompetensi/article/view/3661