Quick Ratio

Loading the player...

What is the 'Quick Ratio'

The quick ratio is 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."

BREAKING DOWN '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.

To learn more about assessing a company's liquidity, check out How do you calculate working capital?

RELATED TERMS
  1. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  2. Cash Asset Ratio

    The current value of marketable securities and cash, divided ...
  3. Liquidity

    The degree to which an asset or security can be quickly bought ...
  4. Quick Liquidity Ratio

    The total amount of a company’s quick assets divided by the sum ...
  5. Liquidity Ratios

    A class of financial metrics that is used to determine a company's ...
  6. Current Assets

    A balance sheet account that represents the value of all assets ...
Related Articles
  1. Term

    What Are Quick Assets?

    A company’s quick assets can be easily converted into cash.
  2. Markets

    Liquidity Measurement Ratios: Quick Ratio

    By Richard Loth (Contact | Biography)The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount ...
  3. Markets

    Liquidity Measurement Ratios: Cash Ratio

    By Richard Loth (Contact | Biography)The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash ...
  4. Fundamental Analysis

    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.
  5. Investing Basics

    Useful Balance Sheet Metrics

    These metrics can help you better understand the information found on balance sheets.
  6. Markets

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  7. Economics

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
  8. Options & Futures

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  9. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  10. Trading Strategies

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
RELATED FAQS
  1. What are the main differences between the current ratio and the quick ratio?

    Find out how the quick ratio and the current ratio can offer different views on a company's ability to pay off liabilities. Read Answer >>
  2. How can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
  3. What are some alternative liquidity ratios to the cash ratio?

    Learn what the cash ratio measures, and understand what two other liquidity ratios can be used by a company to replace the ... Read Answer >>
  4. What is the formula for calculating the quick ratio in Excel?

    Understand the basics of the quick ratio, including how it is used as a measure of a company's liquidity and how to calculate ... Read Answer >>
  5. To what extent should you take a company's liquidity ratio into account before investing ...

    Find out how important it is for an investor to know a company's liquidity ratio before deciding to invest, and why relying ... Read Answer >>
  6. How do you calculate the quick ratio?

    Read about the quick ratio and about the different ways of calculating it, where to find information for it and when you ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center