What each ratio counts
The current ratio counts every current asset: cash, receivables, inventory, prepaid expenses and anything else the business expects to turn into cash or use up within a year. The quick ratio counts only the assets that can become cash quickly, so it leaves inventory out.
This comparison uses the quick ratio’s subtraction form, current assets minus inventory, so both ratios work from the same balance sheet totals. The other common form adds up cash, short-term investments and receivables, which also leaves out prepaid expenses and usually gives a slightly lower figure. The quick ratio page calculates both.
An example where they diverge
Take a business with current assets of $200,000, of which $80,000 is inventory, and current liabilities of $100,000. Its current ratio is 200,000 ÷ 100,000 = 2.00. Its quick ratio is (200,000 − 80,000) ÷ 100,000 = 1.20.
The whole gap comes from inventory. The more of its current assets a business holds as stock, the further its quick ratio falls below its current ratio. Two businesses can share a current ratio of 2.00 and still have very different quick ratios.
When to use which
- Use the current ratio for a broad view of short-term cover, including assets that take longer to turn into cash.
- Use the quick ratio when inventory is slow to sell or hard to value, or when you want to know how the business would manage its near-term bills without relying on stock sales.
- Look at both together to see how much of the business’s short-term cover depends on inventory.
Summary
| Current ratio | Quick ratio | |
|---|---|---|
| Numerator | Current assets | Current assets minus inventory (or cash + short-term investments + receivables) |
| Denominator | Current liabilities | Current liabilities |
| Inventory | Included | Excluded |
| Answers | Do short-term assets cover short-term obligations? | Can the business cover them without selling inventory? |