Liquidity is something essential for the company. From day to day needs to capital expenditure. So the question is how much liquidity is sufficient and how much is high. The current ratio is telling you that thing. But there are some drawbacks to the current balance. Like it is only telling you the money value and not quality value. As inventory is part of the current ratio, it is easy to understand what type of inventory? Raw material, Work in progress, or finished goods? All of their quality is different. With the help of some accounting GIMIC, you can manipulate inventory. Yes, you can influence debtors and creditors, but it is a little complicated. For an inventory, it’s easy. Also, many times inventory is not liquid and also obsolete. These and some other drawbacks make the quick ratio necessary.
The most important thing about the quick ratio is that it shows liquidity’s immediate availability. The only limitation is a limitation of the balance sheet, as the balance sheet will tell you about liquidity at a specific time. Though the liquidity of receivables is more minor than cash, the company can increase it with the help of different ways. Prepaid expenses, though, are taken as assets but not functional.
I will end this by saying that no one ratio can think as single and alone.
