Know the Figures

Current, Quick & Cash Ratio

Whether short-term assets cover short-term bills, with and without stock counted.

Replaces: Credit analyst ratio sheets

How to use it

Enter your current assets by type and your current liabilities from the balance sheet. The calculator works out the three standard liquidity ratios, each counting a narrower set of assets, and shows how much of the headline ratio depends on stock.

Where the number comes from

  • The current ratio divides all current assets by current liabilities.
  • The quick ratio counts only cash and receivables, dropping inventory and prepayments because neither can pay a bill without first being sold or used up.
  • The cash ratio counts cash alone.
  • Net working capital is current assets minus current liabilities, the same comparison in money rather than as a multiple.
  • Days of cash divides cash by daily operating costs (monthly costs × 12 ÷ 365).

What goes wrong

The part most calculators leave out.

  • The balance sheet is a single date. A business can dress its ratios at year end by delaying supplier payments or drawing a loan the day before, and the average month may look very different.
  • Inventory is counted at book value. Slow-moving or obsolete stock would sell for less, so the current ratio overstates cover exactly when stock is hardest to shift.
  • Receivables are only as liquid as the customers. A large balance from one slow payer inflates the quick ratio without bringing cash any closer.
  • Reference levels vary widely by sector: a supermarket runs a current ratio below 1× safely because it collects cash before paying suppliers, while a manufacturer at the same level may be in trouble.
  • Undrawn credit facilities are not on the balance sheet, so a business with a large committed line looks less liquid here than it really is.

A comfortable ratio that rests on stock

A wholesaler holds 180,000 of cash, 420,000 of receivables, 350,000 of stock and 50,000 of prepayments against 640,000 of current liabilities. Net working capital is 360,000 and the current ratio a comfortable-looking 1.56×. Take out stock and prepayments and the quick ratio falls to 0.94× — below 1× — while cash alone covers 0.28×. 40% of current assets have to be sold or used up before they pay anything. At 210,000 of monthly costs, cash covers about 26 days.

Questions

What is the difference between the current ratio and the quick ratio?
The current ratio counts every current asset. The quick ratio, also called the acid-test ratio, leaves out inventory and prepayments, counting only what is cash or close to it. The gap between the two shows how much of your liquidity depends on selling stock.
What is a good current ratio?
Figures of 1.5–2× are commonly cited, but the right level depends on how fast the business turns stock and collects cash. Comparing against businesses in the same sector says more than any single benchmark.
Can a current ratio be too high?
It can mean cash, stock or receivables are piling up rather than being put to work. A very high ratio built on slow-moving stock or overdue receivables is weaker than it looks.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is sent to us or logged, and there is no account to create. Your browser keeps the figures with this tab’s history so that Back and Reload bring them back, and Reset clears them.

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