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Quick ratio definition
Quick ratio is a liquidity metric that measures whether a company can cover its current liabilities using only its most liquid assets. It strips out inventory, which can be slow to turn into cash.
Quick ratio, also called the acid-test ratio, divides cash, marketable securities, and accounts receivable by current liabilities. A reading above 1.0 points to enough liquid cover for near-term bills, while a reading below 1.0 points to a possible shortfall.
Quick ratio is a stricter version of the current ratio. The current ratio counts all current assets, including inventory, against current liabilities. Quick ratio drops inventory and other slow-moving assets, so it gives a tighter read on whether a company can pay its bills without selling stock first.
Quick ratio Example
A company reports four figures:
- Cash: USD 20,000 - Marketable securities: USD 10,000 - Accounts receivable: USD 30,000 - Current liabilities: USD 40,000
You work out the quick ratio:
quick ratio = (cash + marketable securities + accounts receivable) √∑ current liabilities
(USD 20,000 + USD 10,000 + USD 30,000) √∑ USD 40,000 = 1.5
The company holds a quick ratio of 1.5, so it has USD 1.50 in liquid assets for every USD 1.00 of current liabilities.
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