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Quick Ratio vs. Current Ratio 📊
What's the difference?
QUICK RATIO:
Definition:
Measures a company’s ability to pay its current liabilities without relying on the sale of inventory.
Formula:
(Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Analysis:
- Fragile: <0.7
- Robust: 0.7 - 1.5
- Anti-Fragile: 1.5+
Focus:
More conservative measure focusing on the most liquid assets.
Usefulness:
- Preferred in industries where inventory is not easily liquidated or is not a major component of current assets.
Limitation:
- May not be adequate for businesses where inventory is a significant part of current assets and can be quickly converted to cash.
CURRENT RATIO:
Definition:
- Measures a company’s ability to pay its current liabilities with all of its current assets.
Formula:
Current Assets / Current Liabilities
Analysis:
- Fragile: <0.1
- Robust: 1.0 - 2.5
- Anti-Fragile: 2.5+
Focus:
- Broader measure including all assets that are expected to be liquidated within a year.
Usefulness:
- Useful for getting a general idea of the liquidity, but can be skewed by large inventories or other less liquid current assets.
Limitation:
- May overstate liquidity if current assets include significant amounts of inventory or other less liquid assets.
Was anything confusing? Please let me know below. I'll be happy to explain further.
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