Quick Ratio
 |
Definition of 'Quick Ratio'An indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows:Quick ratio = (current assets – inventories) / current liabilities, or = (cash and equivalents + marketable securities + accounts receivable) / current liabilities The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company's liquidity position. Also known as the “acid-test ratio" or "quick assets ratio." |
 |
Investopedia explains 'Quick Ratio'For example, consider a firm with the following current assets on its balance sheet:Cash $5 million, marketable securities $10 million, accounts receivable $15 million, inventories $20 million. This is offset by current liabilities of $20 million. The quick ratio in this case is 1.5 and the current ratio is 2.5. The quick ratio is more conservative than the current ratio because it excludes inventories from current assets. The ratio derives its name presumably from the fact that assets such as cash and marketable securities are quick sources of cash. Inventories generally take time to be converted into cash, and if they have to be sold quickly, the company may have to accept a lower price than book value of these inventories. As a result, they are justifiably excluded from assets that are ready sources of immediate cash. Whether “accounts receivable” is a source of ready cash is debatable, however, and depends on the credit terms that the company extends to its customers. A firm that gives its customers only 30 days to pay will obviously be in a better liquidity position than one that gives them 90 days. But the liquidity position also depends on the credit terms the company has negotiated from its suppliers. For example, if a firm gives its customers 90 days to pay, but has 120 days to pay its suppliers, its liquidity position may be reasonable. The other issue with including accounts receivable as a source of quick cash is that unlike cash and marketable securities – which can typically be converted into cash at the full value shown on the balance sheet – the total accounts receivable amount actually received may be slightly below book value because of discounts for early payment and credit losses. |
 |
Related Video for 'Quick Ratio'
|
Related Definitions
Articles Of Interest
-
Understanding Leverage Ratios
Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ... -
Measuring Company Efficiency
Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period. -
What Is The Quick Ratio?
Find out about this liquidity indicator and how it's used. -
Understanding Liquidity Risk
Make sure that your trades are safe by learning how to measure the liquidity risk. -
Understanding Financial Liquidity
Understanding how this measure works in the market can help keep your finances afloat. -
Dynamic Current Ratio: What It Is And How To Use It
Learn why this ratio may be a good alternative to the current, cash and quick ratios. -
The Amateur Investor's Guide To Analyzing Corporate Efficiency
Find out how the amateur investor can measure the success of management. -
Turnover Ratios Weak Indicator Of Fund Quality
This indicator is not as important as some investors might think. -
How do I measure option liquidity?
An option is a financial instrument that gives the holder the right to purchase shares in a company at a certain set price (strike price) before a set date known as the expiration date. Options, ... -
Liquidity Measurement Ratios
Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
Free Annual Reports