Difference Between Current Ratio and Quick Ratio

Edited by Diffzy | Updated on: April 28, 2022

       

Difference Between Current Ratio and Quick Ratio Difference Between Current Ratio and Quick Ratio

Why read @ Diffzy

Our articles are well-researched

We make unbiased comparisons

Our content is free to access

We are a one-stop platform for finding differences and comparisons

We compare similar terms in both tabular forms as well as in points


Introduction

There are several terminologies that are often used in the financial industry to perform distinct purposes. Before investing in a company, investors can use fundamental analysis to assess its financial performance. A corporation with a high liquidity ratio is always preferred by investors since it demonstrates the entity's financial strength. Liquidity ratings play an essential function in fundamental research. A company employs number of algorithms, ratios, and computations to assess a company's overall fundamental strength. Among numerous procedures utilised by investors, liquidity ratings play a significant role in basic analysis. Current value and rapid rate liquidity rates can assist one to decide if a firm would be able to satisfy its credit commitments when necessary.

Current ratio vs. Quick ratio

The current ratio and the fast ratio are both payroll indicators that evaluate a company's ability to meet its existing debt commitments. In its computation, the current rate takes into account all current assets; however, the current rate only takes into account immediate assets or liquid assets. The current rate takes into account assets that cannot be converted to cash in most instances within 90 days or fewer whereas, the accrual rate, considered the most conservative statistic, only takes into account assets that can be converted to cash quickly. The current rate and the Fast rate are both used to determine an entity's ability to pay its current debtors. The table below illustrates the key differences between the Current Rate and the Speed Rate.

Differences between current ratio and quick ratio in tabular Form

Table: Current ratio vs. Quick ratio
Current Ratio
Quick Ratio
The Current Ratio Is A More Relaxed Approach To Determining A Company's Ability To Repay Debt.
The Quick Ratio is a more stringent and conservative approach to determining a company's ability to repay debt.
This Ratio is used to calculate the relationship between a company's current assets and current liabilities.
This ratio is used to determine the ratio of a company's highly liquid assets to its current liabilities.
This Ratio takes into account all of the company's current assets.
This ratio only includes the company's current assets
That can be converted to cash in less than 90 days. Current ratio is defined as the ratio that calculates
the proportion between the current assets and current liabilities
A company's inventory stock is also included in the current ratio
A company's inventories are not included in the Quick Ratio.
While any ratio greater than one is preferable, the current ratio of 2:1 is preferred.
It is preferable to have a quick ratio of 1:1.
For companies with a large inventory, the current ratio is likely to be naturally high.
For companies with a large inventory, the quick ratio is likely to be naturally low.
Current Ratio takes into account assets that can be converted to cash within a year.
 
Quick Ratio considers only assets that can be converted to cash in 90 days or less
 
Current ratio is the ratio that estimates the amount between the current assets and current liabilities
Quick ratio is the ratio that estimates the amount of most liquid current assets and current liabilities
It is useful for finding the ability of the firm to meet its current obligations
It is useful for determining the ability of a firm to meet any urgent requirement
 

What is the Current Ratio?

Investors use the current rate as liquidity metric to determine if a firm can repay all of its current liabilities with its current assets. Current assets did not include the current rate of current liabilities. The current rate is computed by subtracting current liabilities from current assets. Current liabilities are all short-term company liabilities that must be paid within one year. The current rating of the firm should be larger than one. Anything less than one implies that the firm lacks the assets required to pay all of its creditors if necessary. At the time, 'current assets' were defined as any short-term business assets that could be easily turned into cash throughout the fiscal year. All prepaid costs, inventories, cash and cash equivalents, and so on are included.

The current ratio evaluates a company's capability to pay its existing liabilities with its current assets. While there are several asset kinds, your current ratio calculation will only cover current assets. Current assets are those that can be turned into cash in less than a year. The following are examples of current assets:

  1. Money and monetary equivalents

  2. Receivables (accounts receivable)

  3. Expenses prepaid

  4. Inventory

  5. Security (marketable or liquid)

Obligations, like assets, come in a variety of forms, but can only be included to current liabilities in the current ratio calculation. Debts that are due and payable within a year are referred to as current obligations and these are some examples:

  1. Accounts Receivable

  2. Liabilities accumulated

  3. Short-term debt

The fast rate, on the other hand, is a measure of a company's efficiency in meeting its current financial obligations and its immediate assets, which are assets that may be converted into cash quickly in the short term. The current rate is the rate at which firms calculate their ability to repay short-term loans within a year. A ratio is a mathematical phrase that indicates the proportion of one item to another. A financial ratio depicts the connection between two accounting items. It is used to demonstrate the company's financial health and position, earning capability, and operational efficiency.

Current ratio = (Cash + Marketable securities + Receivables + Inventory) ÷ Current liabilities

The current rate measures a company's ability to meet its commitments and payments on current assets that must be made within a year. Interest rates, liquidity measures, and solvency rates are the three forms of calculation rates. The company's capacity to pay its obligations is reflected in the present high interest rate. It is determined as the ratio of current assets to current liabilities. The value of the company's current assets on the Balance Sheet represents the value of all short-term assets that may be converted into cash or utilised throughout the year. Current liabilities, on the other hand, indicate the company's liabilities and assets as of the end of the fiscal year.

What is the Quick ratio?

Quick ratio is a liquidity metric utilised by investors to assess a company’s aptitude to pay all of its present liabilities and assets. While it may appear to be the same as the current ratio, the fast ratio is a more cautious method of computation since it only considers current assets that may be liquidated in less than 90 days. A quick ratio is also known as an acid-test ratio. The quick ratio is commonly known as the acid-test ratio. A ratio less than one essentially indicate that the corporation is unable to satisfy its liabilities if they all become due at the same time. The acid-test ratio is another name for the quick ratio. Current liabilities = (cash + cash equivalents + current receivables + short-term investments) A company's fast ratio should ideally be greater than one.

Quick assets are assets that can be converted to cash within three months, or 90 days. As a result, it only applies to current assets that can be cashed simply and rapidly, such as cash and near-cash assets. Quick ratio reflects an establishment’s liquidity status, which is how soon the company can fulfil its direct financial necessities. It's also known as a liquid ratio or an acid-test ratio. It assesses the company's efficiency in employing rapid assets, also known as liquid assets, to promptly discharge current liabilities. Quick Assets may be estimated as follows:

Quick ratio formula,

Cash on hand + bank deposits + short-term investments + trade receivables + short-term loans and advances = quick assets. / Or another formula could be-

Quick Assets = Present Resources – Inventories – Prepaid Expenditures

  1. Current Liabilities = Creditors + Cash Credit + Overdraft + Outstanding Expenses + Short term loans + Proposed Dividend + Unclaimed Dividend + Advance from customers + Provision for tax + Other Current Liabilities conservative calculation, as it only includes assets that can be converted to cash in 90 days or less.

Key Differences between Current Ratio and Quick Ratio in Points

  1. The current ratio is a measure of a company's liquidity and solvency in terms of meeting short-term obligations. In contrast to the current ratio, the quick ratio checks the company's liquidity more carefully since it assesses if the company can meet its current financial responsibilities simply using fast assets, i.e. current assets excluding inventory and prepayments.

  2. The current ratio examines the firm's capacity to fulfil its short-term obligations, whereas the quick ratio examines the firm's ability to meet its immediate cash requirements.

  3. The quick ratio, on the other hand, indicates the company's ability to pay off debts in the short term. The current ratio, however, demonstrates the company's ability to generate enough cash to repay its short-term obligations. However, depending on the nature of the company and the kind of current condition, type of current assets, and industry, the two may differ.

  4. The current ratio focuses on all current assets, including inventory, prepaid bills, and so on, whereas the quick ratio focuses on goods that may be turned into cash instantly.

  5. Quick ratio, is known as the acid test ratio, and does not include any inventory or prepaid expenses. It considers only those items that can be easily converted into cash or we can say items that are highly liquid in monetary terms. The current ratio, on the other hand is also known as the working capital ratio, is concerned with ensuring that the corporation can pay off its short-term loans.

Conclusion

Finally, the dilemma of whether to utilise the current ratio or the quick ratio arises; when computing ratios for any organisation, it is always vital to compute more than one ratio. Accounting ratios such as the current ratio and the quick ratio may also help detect difficulty spots and whether a firm is heading in the wrong way. The basic difference between the two liquidity ratios is that quick ratio gives you a better picture of how well a firm repays its short term dues in time, without using the revenue from the sale of inventory. These ratios' data may also be useful when developing financial estimates for a company. Liquidity ratios are used worldwide to check the financial reliability, productivity and functioning competence of the company. Inventory is a dubious item to include in a firm finance study since it might be difficult to convert to cash in the short term. Even though it can be sold in a short amount of time, it is now available (if sold on credit), thus there is an additional weight until the customer pays the receipt. As a result, the quickest rate is the most trustworthy short-term investment rate.

The sole exception is when the firm has a history of high commodity pricing (such as a food shop), where the commodities may be sold not just swiftly but also converted into cash quickly. Although these two ratios appear to be relatively similar at first look, the distinction between current ratio and rapid ratio is quite evident and numerous. Accounting software may also help with reporting by automating the bookkeeping and accounting processes and ensuring the financial statements you create are correct. Both the current ratio and the quick ratio will provide with a gauge of your company's liquidity, but combining these ratios with other accounting ratios will provide with a far broader view of a company's finances. Accounting ratios, on the other hand, may be the answer if you're ready to take financial management and analysis to the next level. Ratios such as the current ratio and the quick ratio are simple to compute and can provide you with a fresh perspective on your company's finances. Both are termed liquidity ratios, and both indicate whether you have adequate current or liquid assets to pay off all of your payments if they become due.

References

Category


Cite this article

Use the citation below to add this article to your bibliography:


Styles:

×

MLA Style Citation


"Difference Between Current Ratio and Quick Ratio." Diffzy.com, 2022. Tue. 24 May. 2022. <https://www.diffzy.com/article/difference-between-current-ratio-and-quick-ratio-48>.



Edited by
Diffzy


Share this article