What is the 'Quick Ratio'
The quick ratio is an indicator of a company’s shortterm liquidity, and measures a company’s ability to meet its shortterm obligations with its most liquid assets. Because we're only concerned with the most liquid assets, the ratio excludes inventories from current assets. Quick ratio is calculated as follows:
Quick ratio = (current assets – inventories) / current liabilities, or
Quick ratio = (cash and equivalents + marketable securities + accounts receivable) / current liabilities
The quick ratio is also known as the acidtest ratio.
BREAKING DOWN 'Quick Ratio'
Quick Ratio vs. Current Ratio
Quick assets are current assets that can be converted to cash within 90 days or in the shortterm. The quick ratio is a liquidity ratio that measures a company's ability, using its quick assets, to pay off its current debt as they come due. The ratio derives its name presumably from the fact that assets such as cash and marketable securities are quick sources of cash. Therefore, only assets that can be liquidated quickly are factored into the equation. Inventory, even though it is a current asset, is not considered a quick asset since it cannot be converted to cash within a very short time frame. Furthermore, if inventories have to be sold quickly, the company may have to accept a lower price than the book value. This is the difference between the quick ratio and the current ratio, which includes all current assets in its calculation including inventory.
Practical Example of a Quick Ratio
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.
Consider 3 competitors  Procter & Gamble, Johnson & Johnson, and KimberlyClark Corp  with the following current assets on their balance sheets for the fiscal year ended 2017.
(in millions)  Procter & Gamble  Johnson & Johnson  KimberlyClark Corporation  
Current Assets  $26,494  $65,032  $5,115  
minus Inventories  $4,624  $8,144  $1,679  
Quick Assets  $21,870  $56,888  $3,436  CA  Inv. 
Current Liabilities  $30,210  $26,287  $5,846  
Quick Ratio  0.7239  2.16  0.5878  QA / CL 
Johnson & Johnson has $2.16 of very liquid assets available to cover each dollar of shortterm debt, thus, the company is in a good liquidity position. However, Procter & Gamble and KimberlyClark may not be able to pay off their current debts using only quick assets since both companies have a quick ratio below 1.
Interpreting the Quick Ratio
While a quick ratio lower than 1 does not necessarily mean the company is going into default or bankruptcy, it could mean that the company is relying heavily on inventory or other assets to pay its short term liabilities. The higher the quick ratio, the better the company's liquidity position. However, too high a quick ratio may indicate that the company has too much cash sitting in its reserves. It may also mean that the company has a high accounts receivables, indicating that the company may be having problems collecting on its account receivables.
Whether accounts receivable is a source of quick 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 offered for early payment and credit losses.

Quick Liquidity Ratio
Quick liquidity ratio is the total amount of a company’s quick ... 
Liquidity Ratios
Liquidity ratios are a class of financial metrics used to determine ... 
Marketable Securities
Marketable securities are liquid financial instruments that can ... 
Overall Liquidity Ratio
Overall liquidity ratio is the measurement of a company’s capacity ... 
Current Assets
Current assets is a balance sheet item that represents the value ... 
Accounting Ratio
Accounting ratios, also known as financial ratios, are used to ...

Investing
Liquidity Measurement Ratios
Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle. 
Investing
Understanding financial liquidity
Financial liquidity comes into play for companies, your personal finances, investing, and the financial markets. However, assets and investments have varying liquidity levels. 
Investing
How to calculate the current ratio in Excel
Understand the basics of the current ratio, including its use in assessing a company's liquidity and learn how it is calculated in Microsoft Excel. 
Investing
Ratio Analysis
Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ... 
Investing
What Is the Best Measure of a Company's Financial Health?
Discover the single best financial metric that investors can use for determining the financial health and longterm sustainability of a company. 
Investing
Working Capital Position
Learn how to determine a company's working capital position to correctly analyze liquidity. 
Investing
Sysco and Other Big Movers In Services
The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ... 
Investing
Analyzing Google's Balance Sheet
We take a look at Google's balance sheet to learn about the health of the company and how well it is run. 
Investing
5 musthave metrics for value investors
In this article, we outline the five ratios that can help value investors find the most undervalued stocks in the market.

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 >> 
How is the acid test ratio calculated?
The acidtest ratio, also known as the quick ratio, measures the liquidity of a company and is a more conservative measurement ... Read Answer >> 
What are the differences between solvency ratios and liquidity ratios?
Learn about liquidity ratios and solvency ratios, some examples of these ratios and the main difference between them. Read Answer >> 
Why do shareholders need financial statements?
Discover the importance of a company's financial statements for stock shareholders in evaluating their equity investment ... Read Answer >> 
Can working capital be too high?
Learn more about the working capital ratio, and understand how an excessively high ratio can be considered a negative in ... Read Answer >>