Quick Ratio

What is Quick Ratio?

The Quick Ratio, also known as the Acid-Test Ratio, measures a company’s ability to pay its short-term liabilities using its most liquid assets (cash, marketable securities, and accounts receivable). It excludes inventory since selling inventory takes time.

Formula:
Quick Ratio = (Total current assets - Inventories) / Total current liabilities

If total current liabilities are negative, the quick ratio is not calculated. It is also not calculated for banks.

What does Quick Ratio mean?

The quick ratio shows how easily a company can pay its short-term obligations using cash or assets that can be quickly converted into cash without losing value in the market. A higher quick ratio means better short-term financial health.