# Calculate Current Ratio

Calculate Current Ratio. Current Ratio Definition, Current Ratio Calculation, and all about the important Acid Test Quick Ratio.

## Liquidity / Cash Flow

Cash flow is an important measure of a company’s liquidity. That is, the ability of the company to convert its assets into cash should such a need arise. The more liquid the company, the more flexible it will be in dealing with short-term liabilities.

## Current Ratio Definition

The basic question is: how much cash can the company raise in the short term? Current liabilities refer to a company’s immediate obligations to creditors, such as short-term loans or goods purchased on credit. The higher the current ratio, the more liquid the company.

## Calculate Current Ratio

The current ratio is a common measure of a company’s short-term liquidity position. It compares a company’s current assets and current liabilities. Current assets refer to the cash or near-cash assets held by the business.

Current Ratio = Current Assets / Current Liabilities

## Acid Test Quick Ratio

However, a problem with the current ratio is that it might not truly measure how quickly a company can raise cash. ‘Near-cash assets’ is a broad term that can include relatively illiquid assets. One solution is to also consider the quick ratio, which subtracts a company’s inventory from its current assets before dividing the number by total current liabilities. This ratio is also known as the ‘acid test’.

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

Sometimes, paying attention to the quick ratio can help you notice early warning signs of possible financial problems. Companies with a falling quick ratio but a steady current ratio indicate accumulating inventory at the expense of cash and receivables.