Balance-sheet financial ratios: current, quick, debt-to-equity, return on equity

One-line orientation

Four ratios derived from the balance sheet and P&L measure a firm’s liquidity (twice — broad and strict), leverage/solvency, and profitability — the ARE tests both the formula and the study benchmark for each.

Key points

All four ratios are sourced from the balance sheet (or balance sheet + P&L for ROE).
Both formulas test near-term payment capacity: current ratio uses all current assets, while quick ratio uses only the most liquid assets.
The quick ratio is a stricter liquidity test than the current ratio because it strips out less-liquid assets.
Debt-to-equity measures financial risk (how leveraged the firm is); a high ratio means creditors own more of the firm than the owners do.
Return on equity ties the income statement (net profit) to the balance sheet (equity), bridging the two financial statements.
Treat the numeric targets as study benchmarks, not code-like minimums or universal firm-health rules.

Four ratios: read the numerator first

FORMULA MAP

Current versus quick changes above the fraction line; the other two formulas measure leverage and profitability

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Current and quick are both liquidity ratios. Debt-to-equity carries the leverage or solvency reading.

Targets shown are study benchmarks, not universal definitions of firm health.

Confusions / comparison

Ratio	Formula	What it measures	Target
Current ratio	Current Assets ÷ Current Liabilities	Liquidity (broad) — meet near-term obligations using all current assets	≥ 1.5
Quick (acid-test) ratio	Liquid Assets ÷ Current Liabilities	Liquidity (strict) — pay with only the most-liquid assets	≥ 1.0
Debt-to-equity ratio	Total Liabilities ÷ Total Equity	Leverage — proportion of debt vs owner financing	< 35% study benchmark
Return on equity (ROE)	Net Profit ÷ Equity	Profitability — return on owner’s investment	≥ 20% study benchmark

Exam pitfalls

Current ratio vs quick ratio: the difference is what counts as an asset. The current ratio includes all current assets; the quick ratio uses only the most liquid ones (cash, receivables). The quick ratio will always be equal to or lower than the current ratio for the same firm.
Current and quick are both liquidity ratios — don’t mislabel either as solvency. Both measure short-term ability to pay (current target ≥ 1.5, broad; quick target ≥ 1.0, strict). Solvency is the long-term picture, measured by debt-to-equity. The exam may describe a liquidity measure and bait you with the word “solvency.”
Debt-to-equity uses total liabilities, not long-term debt only. A candidate might try to exclude short-term obligations — the ratio uses the full liabilities figure from the balance sheet.
A ratio below target is not automatically failing. The targets are study benchmarks, not code minimums or universal industry limits. But exam answers will treat below-target as a warning sign.

→ pp-financial-statements-and-terms: the balance sheet that feeds these ratios; equity definition · pp-accounting-cash-vs-accrual: accounting basis affects the net profit figure used in ROE · pp-firm-planning-tools: profit plan targets are set against these ratio benchmarks.

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One-line orientation

Key points

Confusions / comparison

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