List the bills due soon and the assets that might turn into money in time. The current ratio includes stock, while the quick ratio leaves out stock and other less liquid items. A payment calendar tells you whether the money arrives on time.
Current ratio = current assets ÷ current liabilities
Current assets include items expected to turn into cash, be sold or be used in the short term. The current ratio compares them with current liabilities. The quick ratio removes stock and other less liquid items. Neither ratio tells you exactly when customers pay or when debts fall due. A business with ₹15 lakh of current assets and ₹10 lakh of current liabilities has a 1.5× current ratio.
A business with ₹15 lakh of current assets and ₹10 lakh of current liabilities has a 1.5× current ratio.
Current assets include items expected to turn into cash, be sold or be used in the short term. The current ratio compares them with current liabilities. The quick ratio removes stock and other less liquid items. Neither ratio tells you exactly when customers pay or when debts fall due. A business with ₹15 lakh of current assets and ₹10 lakh of current liabilities has a 1.5× current ratio.
Which item does a quick ratio normally exclude?
Full lesson guide
How the idea works
Current assets include items expected to turn into cash, be sold or be used in the short term. The current ratio compares them with current liabilities. The quick ratio removes stock and other less liquid items. Neither ratio tells you exactly when customers pay or when debts fall due.
Current assets
Cash and other resources expected to be collected, sold or used in the short term.
Current liabilities
Obligations due in the short term.
Apply it to a decision
Fictional example · Review a Jodhpur retailer before supplier payments
A retailer has ₹3 lakh cash, ₹9 lakh in invoices expected to be collected, ₹12 lakh inventory and ₹15 lakh of short-term bills. There are no other current assets.
Calculate both ratios and identify the question to ask next.
Set up the problem. Current assets total ₹24 lakh. The current ratio is ₹24 ÷ ₹15 = 1.60×.
Work it out. Quick assets are ₹12 lakh after excluding stock. The quick ratio is ₹12 ÷ ₹15 = 0.80×.
Read the result. Ask when invoices will be collected and when bills must be paid. The ratios alone cannot establish the size of any cash gap.
Before you use it
Check the quality and timing of the assets before relying on the ratio.
Common mistake. Treating unsold stock and overdue invoices as cash can hide a payment problem.
Assess whether short-term assets can cover short-term bills.
Formula or rule
Current ratio = current assets ÷ current liabilities
Current assets include items expected to turn into cash, be sold or be used in the short term. The current ratio compares them with current liabilities. The quick ratio removes stock and other less liquid items. Neither ratio tells you exactly when customers pay or when debts fall due. A business with ₹15 lakh of current assets and ₹10 lakh of current liabilities has a 1.5× current ratio.
How to approach it
Check the quality and timing of the assets before relying on the ratio.
Common mistake
Treating unsold stock and overdue invoices as cash can hide a payment problem.
Interview recall prompt
Why might a business with a current ratio over one still miss a payment?