← Business Metric: Financial (all topics)
Current ratio & quick ratio
What it is
Current assets divided by current liabilities, and the same test excluding inventory - the quick or acid-test ratio. They measure whether short-term obligations can be met from short-term resources
The gap between the two shows how much of the liquidity position depends on selling stock
Impact on industries
- The simplest solvency screen available, and the first thing a lender or auditor looks at when assessing going concern
- Both are easily window-dressed at the reporting date by delaying payments or accelerating collections, so a period-end figure can mislead
- A high current ratio is not automatically healthy - it often signals bloated inventory or uncollected receivables rather than strength
- The quick ratio is the more honest test in slow-moving inventory businesses, where stock cannot be converted quickly at book value