Quick Ratio vs Current Ratio

Quick Ratio and Current Ratio both measure a company's liquidity and short-term financial health, but they differ in what assets they consider available to cover short-term liabilities. The Current Ratio includes all current assets (cash, accounts receivable, inventory, and other assets expected to be converted to cash within a year) divided by all current liabilities. The Quick Ratio, also known as the Acid-Test Ratio, is more conservative and excludes inventory and other less liquid assets from the calculation, focusing only on cash, cash equivalents, short-term investments, and accounts receivable. This stricter approach provides a clearer picture of a company's ability to meet immediate obligations without relying on inventory sales.

A manufacturing company with significant inventory should consider both ratios when evaluating financial health. The Current Ratio would be more appropriate when assessing overall operational liquidity over a longer timeframe, as it accounts for the value of inventory that will eventually be sold. For example, a furniture manufacturer with a Current Ratio of 2.0 but a Quick Ratio of 0.8 may have adequate resources to meet obligations over time but could face challenges with immediate cash needs. Conversely, the Quick Ratio would be more relevant when analysing the company's ability to handle a sudden economic downturn or supply chain disruption where inventory might become difficult to sell quickly. During economic uncertainty, lenders and suppliers might focus more on the Quick Ratio to determine if the company could pay its bills even if inventory sales stalled.