Liquidity Ratios indicate the ability of the business to pay debts in the short term. A business can be highly profitable on paper and still be unable to pay this month's bills if too much of its value is tied up in inventory or long-term assets instead of cash and near-cash items.
Working Capital
Working Capital is the difference between total current assets and total current liabilities. Unlike the ratios below, it is a dollar amount, not a ratio — it answers "how much cushion, in dollars, is left after covering everything due in the next year?"
The Quick Ratio compares the current assets that are very easily converted to cash with the current liabilities — it is a stricter test than the current ratio because it deliberately EXCLUDES Merchandise Inventory and Prepaid Expenses (both current assets, but neither one is quick to turn into cash). Quick assets are cash, Marketable Securities — items that can be readily converted to cash, for example, government bonds — and Accounts Receivable.
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What counts as "good"?
A current ratio of roughly 2:1 and a quick ratio of roughly 1:1 are often used as rough benchmarks, but "good" genuinely depends on the industry. A grocery store turns its inventory into cash so quickly that a lower current ratio is perfectly safe; a manufacturer with slow-moving, expensive inventory needs a bigger cushion. Always compare a ratio to the SAME company's own trend over time, or to similar businesses in the same industry — never to one fixed universal number.