Latest news

Current and quick ratios

No comments

Current and quick ratios are indicators of a company’s immediate liquidity and its ability to pay its short term liabilities (such as accounts payable and short term debt) through using only its current assets (cash, accounts receivable, inventory). The difference between the two ratios is that “quick” only includes the most liquid assets in the calculation (which usually means excluding inventories).

Current ratio = current assets / current liabilities

 

Quick ratio = (current assets - inventories) / current liabilities

or

Quick ratio = (cash + marketable securities + accounts receivable) / current liabilities

These ratios are usually used as a component of assessing a borrower before funds are advanced, rather than being used as an ongoing financial covenant.
A current or quick ratio of less than 1 may indicate that a company has liquidity issues and may struggle to pay its debts when due. It does not necessarily imply insolvency though, as the business may convert some current liabilities to non-current (such as through refinancing debt), or it may offer customers shorter credit terms than it is offered by its suppliers.

email
Brendan WalpoleCurrent and quick ratios

Leave a Reply

Your email address will not be published. Required fields are marked *