What is Quick Ratio?
The Quick Ratio (also called the Acid-Test Ratio) is a stricter liquidity measure than the Current Ratio. It excludes inventory and prepaid expenses from current assets, focusing only on the most liquid assets (cash, marketable securities, and accounts receivable) that can be converted to cash quickly. This is important because inventory may not be easily liquidated at full book value in a financial emergency. A Quick Ratio above 1.0 is generally considered satisfactory. It is particularly useful for evaluating manufacturers and retailers where inventory is a large component of current assets.
Formula
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) / Current Liabilities
Calculator
How to Use
- 1Find liquid current assets: Cash + short-term investments + accounts receivable. Exclude inventory and prepaid expenses.
- 2Find current liabilities: From the balance sheet.
- 3Divide: Quick Ratio < 1.0 means the company cannot cover current obligations with liquid assets alone.
- 4Compare to Current Ratio: A large gap between Current Ratio and Quick Ratio indicates heavy reliance on inventory; assess inventory turnover.
Worked Example
Example: Manufacturer
Cash + Receivables
$300M
Inventory
$500M
Current Liabilities
$400M
Quick Ratio = $300M / $400M = 0.75×. Below 1.0: the company cannot cover short-term obligations from liquid assets alone. Current Ratio = ($300M + $500M) / $400M = 2.0×; the large gap reveals that 62.5% of current assets are in inventory. If production slows and inventory doesn't sell, liquidity becomes a real concern.