Liquidity Ratios: Current, Quick & Working Capital

Liquidity ratios measure whether a company can cover its short-term bills with the assets it can turn into cash quickly. They weigh current assets, things like cash, receivables and inventory, against current liabilities due within a year. The three most common views are the current ratio, the quick ratio, and working capital.

Each measure looks at liquidity from a slightly different angle:

• Current ratio = current assets ÷ current liabilities. Above 1 means assets exceed near-term bills; many investors like to see roughly 1.5 to 3, while a very high number can signal idle cash.
• Quick ratio (acid test) = the same, but excluding inventory since inventory can be slow to sell. A quick ratio near or above 1 is a stricter sign of safety.
• Working capital = current assets minus current liabilities, a dollar amount rather than a ratio. Positive working capital funds daily operations; negative can mean a squeeze, though some efficient retailers run it deliberately.
• Context matters: healthy levels vary by industry, and ratios that are too high can mean a company is hoarding cash instead of investing it.

A company has $300M in current assets ($90M of it inventory) and $200M in current liabilities. Its current ratio is 1.5, comfortably above 1. Excluding inventory, its quick ratio is ($300M − $90M) ÷ $200M = 1.05, and its working capital is $100M.