Quick Ratio

Quick Ratio provides a measure of a company's ability to meet its short-term obligations using its most liquid assets. Quick assets include those current assets that are convertible to cash at close to their book values.

Quick Ratio

Quick Ratio provides a measure of a company's ability to meet its short-term obligations using its most liquid assets. Quick assets include those current assets that are convertible to cash at close to their book values.  The Quick Ratio is also known as the Acid-Test Ratio or Quick Assets Ratio.

 

Quick Ratio Formula

The Quick Ratio formula divides liquid assets by current liabilities. The liquid assets are determined by deducting inventories from total current assets.  Inventories can be difficult to convert to cash.

Quick Ratio formula:  (Current Assets - Inventories) / Current Liabilities


Another, more accurate formula for the Quick Ratio is:

Quick Ratio formula:  (Cash and cash equivalents + Marketable securities + Accounts receivable) / Current Liabilities

Interpretation of Quick Ratio

Quick Ratio is viewed as a sign of a company's financial strength or weakness. The higher the Quick Ratio, the better the position of the company. It provides information regarding a company’s short term liquidity, informing creditors how much of the company's short term debt can be met by selling the company's liquid assets on short notice.



The commonly acceptable Quick Ratio is 1, but may vary from industry to industry.  A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities;  a bad sign for investors and partners.


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