What is the difference between current ratio and fast ratio?

The difference between the current index and the quick index is that the former includes stock in its equation while the latter does not. The current ratio measures a company's liquidity by dividing current assets by current liabilities. The quick index does essentially the same thing, but can be used when the stock linked to the deal is of variable value.

Assessing the long-term value of the stock can help an analyst decide between the current index and the fast index as a means of determining a company's liquidity. There are several reasons why a stock may not maintain its original sales value. A company may need to lower prices to make enough sales to stay profitable or even stay in business. It may also be necessary to lower prices when there is a lot of capital tied up in inventory.

When determining liquidity, an analyst can use either the current index or the quick index. The quick index can be used primarily to determine whether the company has the resources to bear operating costs. Thus, the current ratio can be used to determine actual current liquidity.

Using the current and fast index or choosing one or the other depends on the company you are researching. For a significant investment, both relationships can be valuable. An analyst who simply wants to know if the company has enough liquid assets to stay afloat may just need the quick index. If it has been determined that the value of the stock is likely to remain stable, the current ration will usually suffice.

In the long run, tracking the current index and the quick index can help an analyst determine whether the stock remains at a beneficial level. The company may have too much inventory if the immediate liquidity ratio decreases while the current ratio remains stable. In this case, a company would like to improve its relationship quickly. The main ways to approach this are to increase sales or gradually decrease the amount of inventory.

Both the current index and the quick index can be used to determine not only how much money is available, but also how it is being used. If the ratios are low, it is possible that a large part of the company's cash will be used for operating expenses. It is also possible that many of your resources are tied to other companies and not available for operations. If the ratio is too high, the company may not be able to invest its excess cash in companies that increase profits.