Definition
In finance, the acid-test or quick ratio or liquidity ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. It is the ratio between quick or liquid assets and current liabilities.
Quick Ratio
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:
Explaining ‘Quick Ratio’
For example, consider a firm with the following current assets on its balance sheet:
Quick Ratio FAQ
What is a good quick ratio?
1 is seen as the normal quick ratio. A company with a quick ratio less than 1 may not be able to fully pay off its current liabilities in the short term, while a company with a quick ratio higher than 1 can instantly get rid of its current liabilities.
How is the quick ratio calculated?
It can be calculated in two ways: QR = (Current Assets – Inventories – Prepaids) / Current Liabilities. QR = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities.
What does a quick ratio of 1 mean?
A company with a quick ratio of 1 means its quick assets and current assets are equal. This also means the company can pay off its current debts without selling its long-term assets. If a company has a quick ratio higher than 1, this means that it owns more quick assets than current liabilities.
What is current ratio vs quick ratio?
The current ratio is the proportion (or quotient or fraction) of current assets amount divided by the current liabilities amount. The quick ratio (or the acid test ratio) is the proportion of 1) only the most liquid current assets to 2) the amount of current liabilities.
Can a current ratio be lower than quick ratio?
If the quick ratio comes out significantly less than the current ratio, this means the company relies heavily on inventory and may be sorely lacking other liquid assets.
Is high quick ratio good or bad?
A quick ratio of 1 or above is good. When the ratio is 1, it means a company’s quick assets are equal to its current liabilities. This means the company should easily pay short-term debts. The higher the ratio, the better.
Further Reading
- Management of financial risks in Slovak enterprises using regression analysis – www.ceeol.com [PDF]
- How firm characteristics affect capital structure: an empirical study – www.emerald.com [PDF]
- Audit prices, product differentiation and economic equilibrium – meridian.allenpress.com [PDF]
- Pengaruh rasio keuangan terhadap kondisi financial distress perusahaan otomotif – jurnaltsm.id [PDF]
- Analisis Pengaruh Firm Size, DER, Asset Growth, ROE, EPS, Quick Ratio dan Past Dividend terhadap Dividend Payout Ratio (Studi pada Perusahaan Manufaktur … – ejournal3.undip.ac.id [PDF]
- International evidence on financial derivatives usage – onlinelibrary.wiley.com [PDF]
