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The quick ratio, commonly referred to as the acid-test ratio, is a financial statistic used to assess the liquidity of a business. It is determined by dividing the whole of a business's liquid assets, such as cash, marketable securities, and accounts receivable, by the total of its current liabilities.
The quick ratio sheds light on a business's capacity to satisfy short-term obligations devoid of the need to liquidate its stock or other fixed assets.
The quick ratio does not take into account inventories or other less liquid assets that can take longer to convert into cash quickly, in contrast to the current ratio which does. The quick ratio gives a more cautious indication of a company's capacity to settle its short-term debts by concentrating exclusively on the assets that are the most liquid.
An ideal quick ratio is 1:1 since it shows that the business has enough liquid assets to meet its immediate liabilities. A company's quick ratio should be compared to others in its industry to gain a more realistic view of its financial health because different industries may have different optimal quick ratios.
The formula for calculating the quick ratio is:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Where:
- Cash includes physical currency and money held in checking and savings accounts
- Marketable Securities include short-term investments that can be easily sold or converted into cash, such as stocks, bonds, and certificates of deposit (CDs)
- Accounts Receivable includes money owed to the company by customers who have not yet paid their bills
- Current Liabilities include any debts or obligations due within the next year
