How is the current ratio different from the quick ratio?

The current ratio and the quick ratio are both liquidity ratios, but they differ in how strictly they measure a company’s ability to pay off short-term liabilities. The current ratio is calculated by dividing current assets by current liabilities. It includes all current assets such as cash, accounts receivable, inventory, and marketable securities. This gives a broad view of liquidity. On the other hand, the quick ratio (also called the acid-test ratio) excludes inventory and other less liquid current assets, using only cash, marketable securities, and receivables in the numerator. It offers a more conservative and immediate picture of financial health because inventory might not be easily converted to cash. A higher quick ratio generally indicates better short-term financial strength. So, the key difference lies in the exclusion of inventory and certain other assets in the quick ratio calculation.