An Introduction to Ratio Analysis - Financial Analysis Tutorial and Concepts

Definitions

An Asset is any 'thing' a business can own. Buildings, equipment, and vehicles are examples of assets that can be depreciated, while cash, bonds, and inventories are assets that are not depreciated.
Current Assets are most easily converted into cash in less than a year.
Current Liabilities are obligations that must be met within a year.
Inventory is the amount of finished product available for sale. It can be found on the balance sheet in the current assets section.
Liquid Assets are the most current of current assets. Liquid assets can be immediately spent. For example, cash and checks are liquid assets; inventory is a current asset but is not liquid. (Unless it's beer!)
Liquidity is a company's ability to meet current obligations using liquid assets.

Current Ratio

The Current Ratio measures a company's ability to meet short-term obligations (under a year) by using current assets
Given the current assets and current liabilities from a company's balance sheet:
Current Ratio = (Current Assets) / (Current Liabilities)
Generally, the higher the ratio, the stronger the liquidity position of the company and the more easily it can meet its obligations.

The Quick Ratio, or Acid Test Ratio, measures a company's ability to meet current liabilities without additional sales of inventory.
For any business with inventory, the Quick Ratio will be lower than the Current Ratio.
Given the current assets, inventories, and current liabilities from a company's balance sheet:
Quick Ratio = (Current Assets - Inventories) / (Current Liabilities)
Like the current ratio, the higher the ratio, the stronger the liquidity position of the company.