Explaining The Current Ratio and Quick Ratio For New Investors | Exploring Markets

Explaining The Current Ratio and Quick Ratio For New Investors

In this post, you're going to learn about two ratios that might help your investing. They are the current ratio and quick ratio.

• The current ratio is current assets divided by current liabilities.
• The quick ratio is cash and equivalents plus marketable securities plus accounts receivable divided by current liabilities.

Those two equations might look confusing but they are not. They are measuring a company's ability to pay or cover its liabilities like debt, accounts payable, and other promises.

The current ratio looks at a company's total assets relative to its total liabilities. The point of this is to show that a company has cash, assets, and other items on its balance sheet that can cover its liabilities. If the current ratio for a company is above 1, that means they have more assets than liabilities. This is a good thing in most cases. If the current ratio is below 1, it means a company has more liabilities than assets.

The quick ratio is very similar to the current ratio. That's why they are both being explained here. The major difference is the quick ratio more extreme. If a company had to pay off and cover all of its liabilities right now, could it do it? The quick ratio answers this question. Rather than using all assets, the quick ratio says to use only liquid assets like cash and accounts receivable. If a company has a quick ratio above 1, that's really good. It technically means they could cover all of their liabilities right now if they really wanted to.

In conclusion, the current ratio and quick ratio are simple investigations into a company's ability to pay off its liabilities with the assets it currently owns. In the world of investing, there are ratios for just about everything. The key is knowing which ratios to use and trust, and which ratios to avoid and be skeptical of. In this case, the current and quick ratios provide interesting insights into a company's ability to pay-off and cover its debts.