Current and quick ratios: is there enough to pay what falls due?
The current ratio divides current assets (those that become cash within a year) by current liabilities (those due within a year). Below 100%, the debts falling due cannot all be paid from assets available in the same period. The quick ratio is a stricter version that leaves out inventory, which only becomes cash once sold.
Formula
- Current ratio = current assets ÷ current liabilities × 100
- Quick ratio = (current assets − inventory) ÷ current liabilities × 100
- Cash ratio = cash and cash equivalents ÷ current liabilities × 100
Each step down keeps only assets that are more certain to become cash. A wide gap between the three means the ability to pay depends heavily on selling inventory or collecting receivables.
Worked example
Figures in units of 100 million KRW. Current assets are 8 (including inventory of 2.5 and cash of 1.5) and current liabilities 5 (values calculated by the Caveat engine).
| Ratio | Prior year | Current year |
|---|---|---|
| Current ratio | 135% | 160% |
| Quick ratio | 90% | 110% |
| Cash ratio | 23% | 30% |
The current ratio is 160%, but 110% without inventory and 30% on cash alone. Paying current liabilities depends on receivables being collected on time. In the prior year the quick ratio was 90%, below 100%.
How to read it
- The 2:1 current ratio and 1:1 quick ratio: old textbook rules of thumb. Retailers and service firms with little stock and cash sales run fine near 100%; manufacturers holding a lot of inventory need more.
- What moved it: check whether current assets grew or current liabilities shrank. A rise driven by piling receivables or inventory can be a bad sign.
- Maturities: the part of long-term borrowing due within a year moves into current liabilities. A sudden drop may mean a loan is coming due.
Both sides: a high ratio looks safe but can reflect idle cash, unsold stock or uncollected receivables. A low ratio may be no problem for a business that collects cash from sales every day.
Look at these too
- Cash conversion cycle (CCC): how many days receivables and inventory take to turn into cash
- Operating cash flow: whether profit is arriving as cash
- Debt-to-equity ratio: the size of total debt, not just short-term
Limitations
- It is a snapshot at the balance-sheet date and can differ from the cash position during the year.
- Doubtful receivables and slow-moving inventory are not separated out.
- For reference only; it does not replace credit, investment or tax decisions.
See it in your own statements
Upload a balance sheet and income statement and Caveat calculates these for your company.
FAQ
- What current ratio is healthy?
- 200% is often quoted, but it is an old rule of thumb. Industries with little inventory, few receivables and cash sales commonly run near 100%. Below 100%, debts due within a year exceed assets that become cash within a year, so the funding plan deserves a look.
- How do the current and quick ratios differ?
- The quick ratio removes inventory from current assets. Inventory only becomes cash once sold, so the quick ratio is a more conservative view of the ability to pay now.
- Can a high current ratio still mean a cash shortage?
- Yes. If current assets are mostly slow receivables or unsold stock, the ratio can be high while spendable cash is short. Check the cash ratio and the cash conversion cycle too.
- Which figures are needed?
- Current assets, current liabilities, inventory, and cash and cash equivalents from the balance sheet.