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Current ratio vs quick ratio

Published August 17, 2026

The current ratio covers next year's bills with every current asset. The quick ratio covers them without inventory. On $600,000 of current assets, $400,000 of liabilities and $160,000 of inventory they read 1.50 and 1.10. A 2.00 current ratio can still be a 0.50 quick ratio.

	Current ratio	Quick ratio
Formula	Current assets / current liabilities.	(Current assets - inventory) / current liabilities.
Teaching-sheet wholesaler	1.50, from $600,000 over $400,000.	1.10, after $160,000 of inventory comes out.
When they match	When inventory is $0, both print 1.50 on that sheet.	Same reading, because nothing is taken out.
When they split	A 2.00 current ratio on $900,000 against $450,000.	A 0.50 quick ratio, because $675,000 of that $900,000 is inventory.
What it is asking	Can the next year of bills be covered if everything current turns into cash.	Can they be covered without waiting to sell the stock.
What it is not	A profit, a cash forecast, or a sector grade.	A claim that inventory is worthless. It is a claim that it is slow.

On this page

Inventory is the whole difference

On the wholesaler sheet, current assets are $600,000 and current liabilities are $400,000. The current ratio is 1.50. Take $160,000 of inventory out and the quick ratio is 1.10.

The bills did not change. The numerator did. Working capital is the dollar gap behind the current ratio. The quick ratio is the same gap with the slowest asset removed.

Set inventory to $0 and both ratios print 1.50. There is nothing to take out. A software-shaped sheet and a warehouse can share a current ratio and disagree the moment inventory is named.

A 2.00 that is not a cash buffer

Current assets $900,000, liabilities $450,000, inventory $675,000. Current ratio 2.00. Quick ratio 0.50. Gross margin on that sheet is 22 percent, from $1,100,000 of gross profit on $5,000,000 of revenue, which is a different claim again.

How the current ratio works is the long form, with the business-ratios calculator under the answer. What liquidity means is why a ratio on a balance sheet is not the same as cash on Tuesday. This is educational material, not financial advice.

Worked examples

A wholesaler, all three ratios

A distributor holds $600,000 of current assets, of which $160,000 is inventory, against $400,000 of current liabilities. Over the year it sold $2,000,000 of goods that cost $1,300,000 to buy. What do the three ratios read?

Current ratio is current assets over current liabilities: $600{,}000 / 400{,}000 = 1.50$ .
Take the inventory out to get the quick assets: $600{,}000 - 160{,}000 = 440{,}000$ .
Quick ratio divides that by the same liabilities: $440{,}000 / 400{,}000 = 1.10$ .
Gross profit is revenue minus the cost of goods sold: $2,000,000 minus $1,300,000 is $700,000.
Gross margin is gross profit over revenue: $700{,}000 / 2{,}000{,}000 = 0.35$ , which is 35 percent.

The current ratio is 1.50 and the quick ratio is 1.10, so the next year of bills is covered either way you count. Gross margin is 35 percent, meaning $700,000 of the $2,000,000 in sales is left over to pay wages, rent and everything else that is not the cost of the goods themselves.

Same liquidity, a completely different margin

A software company reports the same $600,000 of current assets and $400,000 of current liabilities, but holds no inventory at all. It bills $2,000,000 a year, and its cost of goods sold, mostly hosting and customer support, is $300,000. How does it compare with the wholesaler?

The current ratio is identical: $600{,}000 / 400{,}000 = 1.50$ .
Nothing comes out for inventory, so the quick ratio is the same 1.50.
Gross profit is $2,000,000 minus $300,000, which is $1,700,000.
Gross margin is $1{,}700{,}000 / 2{,}000{,}000 = 0.85$ , which is 85 percent.

Both liquidity ratios read 1.50, because there is no inventory to strip out. Gross margin is 85 percent against the wholesaler's 35 percent on the same $2,000,000 of sales. Neither company is better run than the other. One buys goods and resells them, the other writes code once and sells it many times, and the margin is mostly telling you which is which.

Liquid on paper, not once the stock comes out

A grocery chain holds $900,000 of current assets against $450,000 of current liabilities, which looks comfortable next to both companies above. But $675,000 of that is stock sitting on the shelves. Revenue is $5,000,000 and the goods cost $3,900,000.

Current ratio: $900{,}000 / 450{,}000 = 2.00$ , the strongest reading on this page.
Quick assets are what is left once the stock comes out: $900{,}000 - 675{,}000 = 225{,}000$ .
Quick ratio: $225{,}000 / 450{,}000 = 0.50$ , the weakest reading on this page.
Gross profit is $5,000,000 minus $3,900,000, which is $1,100,000.
Gross margin is $1{,}100{,}000 / 5{,}000{,}000 = 0.22$ , which is 22 percent.

The same company scores 2.00 on the current ratio and 0.50 on the quick ratio. Three quarters of its current assets are groceries, so the bills falling due in the next year are twice the quick assets standing behind them. For a grocer that sells its stock in days and pays suppliers later, this is ordinary. In a firm holding machine parts that turn over once a year, the identical 0.50 would be a real warning.

Common questions

Is a current ratio above 1 enough?

It means current assets cover current liabilities on the sheet you typed. On the wholesaler, 1.50 is $600,000 against $400,000. The quick ratio of 1.10 is the tighter reading of the same sheet.

Why take inventory out?

Because it is usually the slowest current asset to turn into cash. On the third sheet, $675,000 of inventory is most of the $900,000 of current assets, and the quick ratio falls to 0.50 while the current ratio prints 2.00.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.