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Ratio Rattles: Current Ratio and Quick Ratio

Let’s look at two very easy ratios to detect the short term liquidity of the company: Current Ratio and Quick Ratio.

Current Ratio = Current Assets / Current Liabilities

As a general rule of thumb from The Morley Fool:

As a general rule, a current ratio of 1.5 or greater can meet near-term operating needs sufficiently. A higher current ratio can suggest that a company is hoarding assets instead of using them to grow the business — not the worst thing in the world, but it’s something that could affect long-term returns.

The information should be used again its competitors.

Since companies can manipulate and often bloat the inventory book value, I can use a second ratio:

Quick Ratio = (Current Assets – Inventories) / Current Liabilities

Most people look for a quick ratio greater than 1.0 to be sure there is enough cash on hand to pay bills and keep going.

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