Quick ratio vs current ratio

Two ratios are used to measure a business’s ability to meet its own short-term liabilities.

The current ratio formula is:

Current ratio = Current assets / Current liabilities

The quick ratio (acid test ratio) formula is:

Quick raito = (Current assets – inventory) /Current liabilities

Two ratios are relevant to consider the nature of the business. And they can be distorted by window dressing. For example, if the current ratio is 1.4 and trade payables are paid just before the year end out of positive cash balances, the raitos improve as shown below:

Related posts:

1. Quick ratio analysis
2. Current ratio analysis
3. Current and liquid ratios
4. Return on capital employed (ROCE) ratio and formula
5. Inventory turnover ratio