Difference Between Current Ratio vs Quick Ratio
If you are struggling to spot the difference between current ratio and quick ratio, your story will certainly change after going through this informative read. As you already know, they are terms used in professions like commerce and accounting. One promise you will get from us is that this guide will break it down for you.
However, it is crucial we start the guide by defining the terms before distinguishing between the two terms. The reason for doing so is to help you grasp them easily. Now, let’s get started with this guide on quick ratio vs current ratio.
Definition of Current Ratio
The current ratio is simply the proportionate value between existing assets and liabilities. Every organization that wishes to maintain a positive reputation with its creditors must keep this figure high. When that happens, the creditors will be easily impressed.
Another advantage that it brings is that every organization that knows its actual proportion can easily tackle its short-term liabilities. In other words, the business can determine its liquidity and ability to repay its short-term debts. According to experts, the recommended figure should be 2:1. This means that a business’s asset value is twice that of its liability.
In clear terms, creditors often look for that figure because it is a strong indication that the firm can repay their creditors. However, there is a caveat.
When the figure is extremely high, the impression the firm creates is that it is not using its resources in the best possible ways, meaning that the investors will not have high returns as expected. Before walking you through the difference between quick ratio and current ratio, you need to grasp the former first.
Definition of Quick Ratio
The quick ratio is the capacity of a company to liquefy its assets so as to clear its outstanding debts. Put simply, it is the numeric proportion between the liquefiable valuables or investments to the existing liabilities. This concept is also crucial in managing companies. The idea behind it is that it focuses on those corporate belongings that can be converted into liquid cash in a split second.
This makes perfect sense because it becomes pretty complicated to evaluate certain valuables when the firm runs into a deep financial crisis. According to experts, the recommended figure ought to be 1:1. It is worth noting that when the figure is less than one, a business will not be able to repay its debt.
Also, it is known as the acid-test concept because a fast result can be obtained from it. Since it focuses on valuables that can be liquefied, the concept is considered a conservative technique for measuring a firm’s financial position.
Main Differences Between Current Ratio vs Quick Ratio
To fully grasp these terms, go through the table carefully.
|Basis of Comparison||Current Ratio||Quick Ratio|
|Meaning||This figure represents the proportion of the existing valuables to the liabilities of an enterprise||This is the proportion of valuables that can be turned into liquid cash to the existing liabilities|
|Relevance||It is independent of the presence of a sudden crisis||This helps a company to assess its ability to repay its debts|
|Ideal figure||The ideal figure here is 2:1||The ideal figure here is 1:1|
|Formula||Current assets/current liabilities||Liquid assets/current liabilities|
|Result||The result obtained here shows if an enterprise is capable of meeting its debt obligations or not||The result shows how ready an enterprise is to discharge immediate cash requirements|
|Timeframe||The timeframe is often within one year||The timeframe is undefined|
Difference Between Current Ratio and Quick Ratio: Conclusion
In conclusion, this guide will be incomplete without a recap of what these two concepts stand for. While this article on current ratio vs quick ratio has been an interesting read, one must note that they are important techniques for assessing the financial status of a business.
Remember that the former focuses on an organization’s capacity to meet its debt obligations while the latter emphasizes a firm’s ability to discharge its immediate financial needs by converting its valuables to liquid cash. Sure, this is the most significant disparity. Finally, you ought to know how to apply the ideas before starting your firm.