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The current ratio
The current ratio is current assets divided by current liabilities — everything you own that will turn to cash within a year, against everything you owe within a year. A ratio above 1 means your short-term assets cover your short-term debts. Around 1.5 is often cited as comfortable, though the ideal varies by sector. Below 1 is a warning that you may struggle to meet obligations as they fall due.
The quick ratio
The quick ratio, or acid test, is stricter: it strips stock out of current assets, because stock cannot always be turned into cash quickly. It measures whether you could cover short-term liabilities using only cash, near-cash and money owed to you — not inventory you would have to sell first. For a stock-heavy business, the quick ratio can look very different from the current ratio, and it is the more honest liquidity test.
What good looks like
There is no universal target. A supermarket happily runs a current ratio below 1 because it takes cash immediately and pays suppliers later; a manufacturer holding lots of stock and slow debtors may need a ratio well above 1.5 to feel safe. Read the ratio against your sector and your cash flow gap, not an abstract benchmark. Trend matters more than the single number.
How lenders use them
Lenders look at these ratios as a quick read on whether a business can weather short-term pressure. A healthy, stable current and quick ratio supports an application; a deteriorating one prompts questions. But they are one input among many — cash flow, profitability and record all matter. See how to check loan affordability.
Strengthening your liquidity
You improve both ratios by holding more current assets or fewer current liabilities — collecting debtors faster, clearing slow stock, or refinancing short-term debt into longer-term facilities that fall outside current liabilities.
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Frequently asked questions
What's the difference between the current and quick ratio?
Both measure short-term liquidity, but the quick ratio excludes stock, because inventory can't always be turned into cash quickly. The quick ratio is the stricter, often more honest test.
What's a good current ratio?
Around 1.5 is often cited as comfortable, but it varies by sector — a supermarket runs below 1 by design, a stock-heavy manufacturer may need well above 1.5. Read it against your sector and trend.
How do I improve my liquidity ratios?
Collect debtors faster, clear slow-moving stock, and refinance short-term debt into longer-term facilities. Anything that raises current assets or lowers current liabilities lifts the ratios.
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