Can this company pay its bills next year?

A business can be profitable on paper and still fail — because profit and cash you can reach right now are not the same thing. Liquidity ratios ask a blunt, short-term question: if the bills came due soon, could the company cover them?

Current assets vs current liabilities

The balance sheet splits things into "current" (within a year) and "long-term." Liquidity compares the two short-term piles:

• Current ratio = current assets ÷ current liabilities. Current assets are cash plus things expected to become cash within a year — receivables, inventory. Current liabilities are what's owed within a year. A current ratio of 1.5 means $1.50 of short-term resources for every $1 of short-term obligations.
• Quick ratio (or "acid-test") = (current assets − inventory) ÷ current liabilities. The stricter cousin: it removes inventory, because inventory can be slow or hard to sell for full value in a pinch. It answers the same question, minus the optimism about selling stock quickly.

A worked example

An illustrative retailer:

• Current assets $20bn (of which inventory $12bn), current liabilities $16bn.
• Current ratio = 20 ÷ 16 = 1.25.
• Quick ratio = (20 − 12) ÷ 16 = 8 ÷ 16 = 0.50.

A comfortable-looking current ratio of 1.25 becomes a much tighter 0.50 once you strip out inventory. For a retailer that sells its stock quickly and reliably, that may be perfectly normal. For a business whose inventory moves slowly, the same 0.50 is a warning worth understanding.

Higher isn't automatically better

A current ratio of 5 might sound safe, but it can mean the company is hoarding cash or inventory it could deploy more productively — sluggish, not strong. Like margins, liquidity ratios are read against the industry norm and the company's own history, not against a universal "good" line. The point of the pair is to see the same short-term picture through two lenses: one that trusts inventory to convert, and one that doesn't.

In the data

Neither ratio is published ready-made; both come from three lines on one balance sheet: current assets, current liabilities and inventory. Here they are for Apple:

The quick ratio is where readers slip. A software or service company that carries no inventory shows the inventory line blank, and a blank is "no line reported", not a figure you can subtract without thinking. Check what the line says before you strip it out.

Try it now

1. Compute the current ratio from the table above — total current assets ÷ total current liabilities.
2. Compute the quick ratio — subtract inventory from current assets first, then divide again.
3. See how far apart they are. For this company the inventory line is small next to total current assets, so the two ratios land close together — and that closeness is itself the reading: this is not an inventory-heavy business. Look at the level separately from the gap. If it sits below 1, that is a fact about how this business is financed rather than a warning; a company paid by customers faster than it pays suppliers can run there comfortably for years.
4. Now try a filer that carries no inventory at all, a software company:

Compute the quick ratio the naive way — straight subtraction, no check. Write down what you got. The section above says what a blank inventory line means for such a filer and why that arithmetic does not mean what it appears to. The same table also prints net working capital, current assets minus current liabilities, already worked out. A big current-to-quick gap tells the opposite story to Apple's, and it will matter again at inventory turnover in the efficiency unit.