Quick ratio

Definition

The quick ratio measures a company's ability to meet its short-term obligations using its most liquid assets. It is calculated as (Current Assets - Inventory) / Current Liabilities.

5 Must Know Facts For Your Next Test

1. A quick ratio greater than 1 indicates that a company can cover its short-term liabilities without selling inventory.
2. The quick ratio is also known as the acid-test ratio.
3. It excludes inventory from current assets because inventory is not as easily converted to cash compared to other current assets.
4. A low quick ratio may signal potential liquidity problems for a company.
5. Industries with slower inventory turnover typically have lower quick ratios compared to those with rapid turnover.

Review Questions

• What does a quick ratio greater than 1 signify?
• Why is inventory excluded in the calculation of the quick ratio?
• What alternative name is given to the quick ratio?

Related terms

Current Ratio:

Measures a company's ability to pay short-term obligations, calculated as Current Assets / Current Liabilities.

Cash Ratio:

Evaluates a company's liquidity by measuring its ability to pay off short-term liabilities using only cash and cash equivalents, calculated as Cash / Current Liabilities.

Working Capital:

Represents the difference between current assets and current liabilities, indicating the short-term financial health of a company.