What is the ideal current and liquid ratio?

2 MinsShareFinancial ratios are important indicators for gauging a companys financial health. They show the financial position of the company, including its profitability and liqui

What is the ideal current and liquid ratio?

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Financial ratios are important indicators for gauging a companys financial health. They show the financial position of the company, including its profitability and liquidity position. The two important ratios for measuring a companys ability to pay short term obligations and liquidity are the current and quick ratios. This article covers the current ratio, quick ratio and current vs quick ratio in detail.

Current Ratio vs Quick Ratio  Difference between Current Ratio and Quick Ratio

Following are the key differences between the Current Ratio vs Quick Ratio:Basis of DifferenceCurrent RatioQuick RatioDefinitionThe current ratio is a liquidity ratio that computes the proportion of a companys current assets to its current liabilities.The quick ratio is also a liquidity ratio that computes the proportion of a companys highly liquid assets to its current liabilities.ApproachThe current ratio is comparatively a relaxed approach to determine a companys debt repayment capacity.The quick ratio is a stringent and conservative approach to determine a companys debt repayment capacity.ConsiderationConsiders assets that are easily convertible to cash within a year.Considers assets that are easily convertible to cash in 90 days or earlier.InventoryIncludes inventory. Also, the current ratio is naturally high for firms with a strong stock of inventory.Excludes inventory. Also, the quick ratio is low for firms with a strong stock of inventory.Ideal ResultThe ideal ratio is 2:1. However, anything above 1 is good.The ideal ratio is 1:1.

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