What is the difference between the current ratio and the rapid ratio?
The difference between the current ratio and the rapid ratio is that the first includes the inventory in its equation, while the second does not. The current ratio measures the liquidity of society by dividing the current assets by current obligations. The rapid ratio is essentially the same, but can be used when the inventory is connected to the company as a variable value.
Long -term inventory assessment can help the analyst in deciding between the current ratio and the rapid ratio as a means of determining the liquidity of the company. There are several reasons why the inventory does not have to maintain its original sales value. The company may have to indicate prices to be sufficient sales to remain profitable or even stay in business. It may also be necessary to reduce prices when too much capital is tied in the inventory.
In determining liquidity, the analyst can use the current ratio and a fast ratio. The rapid ratio can be used first to find that HJAKO resources for operating costs. PAK could be used by the current ratio to determine the actual current liquidity.
whether to use both current and fast ratio or choose one or the other depends on the investigation of the company. Both conditions can be valuable for a significant investment. An analyst who simply wants to know if the company has enough liquid assets to stay above the water can only need a quick ratio. If the stock value has been found to remain stable, then the current dose is often enough.
In the long run, monitoring the ratio of current and fast ratio can help the analyst to determine whether the inventory is maintained at a beneficial level. The company could have too much supplies if the rapid ratio drops while the current ratio remains stable. In this case, the company would like to improve its rapid ratio. Primary ways to solve it is to increase sales or gradually reduce the amount of stocks.
actThe both and fast ratios can be used not only to determine the amount of cash available, but also on how it is used. If the ratios are low, it is possible that a large part of the company's cash is used for operating costs. It is also possible that too many of its resources are tied in other businesses and is not easily accessible for operations. If the ratio is too high, then the company may not be able to invest its extra cash in businesses that will increase profits.