Stricter liquidity ratio that compares quick assets with current liabilities without relying on inventory conversion.
The quick ratio is a stricter liquidity ratio that compares a business’s most liquid short-term assets with current liabilities. It is designed to show short-term coverage without depending heavily on inventory sales.
Because inventory can take time to sell and prepaid expenses do not become cash, the quick ratio often gives a sharper view of near-term liquidity pressure than the current ratio.
Common formulations include:
Quick ratio = quick assets / current liabilities.
or
Quick ratio = (current assets - inventory - certain prepaids) / current liabilities.
Quick assets usually include cash, short-term marketable securities, and accounts receivable expected to convert relatively quickly.
If a company has current assets of 180,000, including 70,000 of inventory and 10,000 of prepaid items, and current liabilities of 100,000, quick assets are 100,000 and the quick ratio is 1.0:
| Item | Amount |
|---|---|
| Current assets | 180,000 |
| Less inventory | (70,000) |
| Less certain prepaids | (10,000) |
| Quick assets | 100,000 |
| Current liabilities | 100,000 |
| Quick ratio | 1.0 |
The quick ratio is often called the acid-test ratio. It is not identical to the current ratio because it excludes less-liquid current assets. A ratio above 1.0 can still be misleading if receivables are hard to collect.