The Current Ratio is a financial ratio that measures whether a company has enough resources to pay its debts over a short period of times say next 12 months. It is calculated as :-
Current Ratio = Current Assets / Current Liabilities
This ratio basically reveals how easily a company can deal with unexpected expenses or opportunities. Its Current Assets are things that are used up and replenished frequently such as cash, inventory, and accounts receivable. Its Current Liabilities are the ones usually due within one year. All these figure can be easily obtained in a company's balance sheet. Current Ratio at least 2:1 is usually considered to be acceptable; that is to say the company's assets are at least twice its liabilities; the company is considered to have good short-term financial strength to meet its creditor's demands. If the ratio is below 1, then the company may have problems meting its short-term obligations. Too high a current ratio doesn't mean good either as this may indicate the company is not efficiently using its current assets.
The Quick Ratio or Acid-Test or Liquid Ratio is very similar to Current Ratio. It measures the ability of a company to use its quick assets ( cash, cash equivalents such as marketable securities, accounts receivable ) to respond to a sudden/surprise bill/opportunity. This ratio indicates a company's capacity to maintain operations as usual with current cash/cash equivalents in bad periods. This is calculated as followed :-
Quick Ratio = ( Current Assets - Inventories ) / Current Liabilities
Current Assets - Inventories = Cash & Equivalents + Short-term Investment + Accounts Receivable
The Quick Ratio can be considered a much more conservative and stringent measurement as compared to Current Ratio in accessing a company short-term liquidity as it excludes the Inventories from its calculation. Inventories are excluded because some companies have difficulty turning their inventories into cash within short period of time to meet their obligations. In general a Quick Ratio at least 1:1 is acceptable.
Example :-
With reference to SPH FY08 Annual Result
Current Liabilities = $367,444,000
Current Assets = $1,138,265,000
Inventories = $36,281,000
Current Ratio = $1,138,265,000 / $367,444,000 = 3.098
Quick Ratio = ( $1,138,265,000 - $36,281,000 ) / $367,444,000 = 3.00
With reference to Ferrochina FY07 Annual Report
Current Liabilities = RMB 5,416,344,000
Current Assets = RMB 5,149,406,000
Inventories = RMB 1,809,465,000
Current Ratio = RMB 5,149,406,000 / RMB 5,416,344,000 = 0.951
Quick Ratio = ( RMB 5,149,406,000 - RMB 1,809,465,000 ) / RMB 5,416,344,000 = 0.617
