What is the quick ratio vs. current ratio? This is a concept that is no longer strange to many people, but in fact, not everyone understands it well. Which is better, the quick ratio or the current ratio? Please see the article below for further information.

Quick Ratio vs. Current Ratio: An Overview

What is the quick ratio?

The quick ratio, also known as the acid test ratio, is a conservative measure of your company’s liquidity because it only employs a portion of your current assets. Quick ratio calculations, unlike current ratio calculations, only use short-term assets or investments that can be liquidated for cash in 90 days or less.

What is the current ratio?

The current ratio assesses a company’s capacity to balance current liabilities and short-term debts with current assets. The working capital ratio is another name for this figure.

Quick ratio vs. current ratio: what is included in?

What is included in the quick ratio?

You will include cash and cash equivalents, accounts receivable, and marketable securities in your quick ratio calculations. When calculating rapid ratios, you usually exclude inventories and prepaid expenses because you can’t convert them into cash in 90 days.

The current liabilities, which comprise short-term debt, accrued liabilities, and accounts payable, remain unchanged.

What is included in the current ratio?

Only current assets, which can be turned into cash within a year, are used in current ratio computations. Similarly, current liabilities are debts owed by your organization that are due within a year.

Accounts receivables, cash and cash equivalents, securities, inventories, and prepaid expenses are the most prevalent current assets. Accrued liabilities, accounts payable, short-term debts, and other debts are examples of current liabilities.

Quick ratio vs. current ratio: How to calculate?

Quick ratio formula

There are 2 ways to calculate the quick ratio: 

Quick Ratio Formula # 1

QR = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

The quick ratio formula is related to the current ratio formula. Except for inventories, everything is classified as current assets.

A quick recalculation using the example above reveals that your company now has $150,000 in current assets and $100,000 in current liabilities.

The firm’s quick ratio is : 150,000 ÷ 100,000 = 1.5.

After deducting inventory and prepaid expenses, your company has a terrific asset-to-liability ratio of $1.5 for every dollar in liabilities.

Quick Ratio Formula # 2

Consider the second method for calculating the quick ratio (acid test ratio). 

QR = (Total current assets – Inventory – Prepaid Expenses) / Current Liabilities

In this situation, you may simply deduct the inventories and prepaid expenses from the company’s balance sheet, leaving only the current assets. To determine the fast or acid test ratio, divide the amount by current liabilities.

Formula for current ratio

To determine the current ratio, combine all of your company’s current assets together and divide them by its current liabilities.

For instance, if your firm’s total current assets amount to $250,000 and your total current liabilities amount to $100,000, your current ratio would be: $250k ÷ $100k = 2.5

This means that for every $1 in current liabilities, your company has $2.5 in current assets.

Quick ratio vs. current ratio: How to evaluate?

What is a good company’s quick ratio?

A quick ratio greater than one is beneficial since it indicates that your assets and obligations are in balance. Anything less than one indicates that your company may have difficulty meeting its financial responsibilities.

If the quick ratio is too high, the company is not effectively utilizing its assets. While this formula can be applied to almost any industry, it falls short of describing the SaaS model.

What is a good company’s current ratio?

Because you can quickly pay off your bills without running into liquidity concerns, two is the perfect current ratio. Any number less than two puts your company in the danger zone. It means you have a cash flow problem and don’t have enough assets to pay off your present debts.

While a high current ratio may appear beneficial, anything greater than four is problematic. It means the company is underutilizing its assets.

The key differences between quick and current ratios

Because they evaluate a firm’s short-term liquidity, the quick ratio and current ratio are both liquidity ratios. The ratios are a good measure of a company’s financial health and ability to satisfy its debt commitments because they include the company’s account receivables in their computation.

The following are the key distinctions between the quick ratio vs current ratio:

• Only quick assets are used in the quick ratio, and any assets that can’t be liquidated and turned into cash in 90 days or less are excluded. The current ratio takes into account all assets that can be liquidated and turned into cash in a year’s time.
• The quick ratio of a corporation does not include inventory in its computations, but the current ratio does.
• For most firms, except SaaS, a 2:1 result is ideal for the current ratio, while a 1:1 result is ideal for the quick ratio.
• Quick ratio calculations only involve quick or liquid assets, whereas current ratio estimates include all the firm’s current assets.
• A company’s quick ratio is similarly cautious since it provides short-term (three-month) information, whereas the current ratio provides long-term insights (a year or longer).

Which one is better?

Both the quick ratio and the current ratio are useful for financial analysis, but the quick ratio should be used if you’re more concerned about covering short-term debt in the next 90 days. The current ratio provides a well-rounded view of assets vs. liabilities for a longer-term assessment of a company’s liquidity. To acquire a better understanding of your business’s short and long-term liquidity, you should calculate both.

Conclusion

Both the current ratio vs quick ratio can be used to examine if a company’s current liabilities can be readily paid off with its liquid assets.

A company’s excellent liquidity ratio is usually beneficial to investors. It denotes a company’s strong financial position. As a result, these ratios play a vital role in a company’s fundamental examination.