Quick Ratio

Quick Ratio - or acid test ratio - is used to evaluate company’s ability to overcome its short-term liabilities with its most liquid assets, like cash and cash equivalents, marketable securities and accounts receivable. It can be calculated by deducting inventories from the total short term assets, and dividing them by current liabilities.

Quick ratio is more conservative than its father - current ratio, because when calculating it, we should deduct inventories, which are not always so liquid. Inventory is excluded because some companies have difficulty turning their inventory into cash. It is because some companies are overestimating their ability to cash out their inventory, when thinking, that they are producing the best production that is on demand whenever they want to sell it. In real life it is different and usually it takes some time to realize inventory from the stock.

Current Ratio

Current Ratio - is one of the most popular financial ratios, which determines how much of current liabilities can be paid in short term period using current assets. While talking about this ratio - short term period is one year. This ratio shows what is the level of assets that can be liquidated in one year and how much of companies’ liabilities can be financed of it. This ratio is calculated by dividing short term (current) assets by short term liabilities.

This ratio is showing the financial strength of the company. The result of the ratio should be between 1 and 2. If the ratio is higher than 1, it means that company has enough short term assets to finance current obligations, but it is possible that the company is facing a serious problem as well. Short term assets consist of raw material inventory, products made and stocked, cash in bank, loans and advances made by the company. It means that if the current ratio is too high it is possible, that the company is not managing inventory in the stock very well. Even if those goods that are held in the stock are liquid, in some cases there can be no demand for them, and they may be stocked for a very long time, which is not effective for a company at all.