Quick Ratio

Intermediate

The quick ratio is a company's most liquid current assets, typically cash, short-term investments and receivables, divided by its current liabilities. It tests whether short-term obligations could be met without selling inventory.

The quick ratio, also called the acid-test ratio, is a stricter version of the current ratio. It excludes inventory and usually prepaid expenses, because these may not be turned into cash quickly or at full value.

For example, a company has current assets of 500,000, including inventory of 150,000, and current liabilities of 250,000. Its quick assets are 350,000, giving a quick ratio of 1.4. Its current ratio, by comparison, is 2.0.

A quick ratio of 1 or more suggests the company can meet its short-term obligations from its most liquid assets alone. A ratio well below 1 may mean it depends on selling inventory to pay its bills, which can be risky if sales slow.

The quick ratio is particularly useful for businesses that hold large or slow-moving inventories, such as manufacturers or retailers of seasonal goods, where the current ratio might give an overly comfortable picture.

As with other liquidity ratios, what counts as healthy depends on the industry and the business model. Comparing the ratio with competitors and with the company's own history gives the most useful insight.

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