What Is the Quick Ratio?
The quick ratio is a liquidity measure that shows whether a company can cover its short-term liabilities using its most liquid assets, excluding inventory. Also called the acid-test ratio, it's calculated as (current assets − inventory) ÷ current liabilities.
What the quick ratio is and why it matters
The quick ratio is a stricter version of the current ratio. By stripping out inventory — which can be slow or costly to convert to cash — it tests whether a business could meet its immediate obligations with cash, marketable securities, and receivables alone. A quick ratio of 1.0 means liquid assets exactly cover current liabilities; above 1.0 signals comfortable short-term liquidity, while below 1.0 warns the business may struggle to pay bills without selling inventory or raising cash. It's especially telling for inventory-heavy businesses, where the current ratio can look healthier than reality.
A worked example
A company has current assets of $200,000, of which $80,000 is inventory, and current liabilities of $100,000. Quick ratio = ($200,000 − $80,000) ÷ $100,000 = $120,000 ÷ $100,000 = 1.2. So it has $1.20 of readily liquid assets for every $1 of short-term obligations. Its current ratio, by contrast, would be $200,000 ÷ $100,000 = 2.0 — the gap shows how much of its liquidity depends on selling inventory.
How firms handle it today
Firms calculate the quick ratio from reconciled balance-sheet figures and track it alongside other liquidity metrics, flagging deterioration during client reviews.
Related terms
- Liquidity
- Current asset
- Working capital
- Inventory
- Liability
FAQ
What's the quick ratio formula?
(Current assets − inventory) ÷ current liabilities. Some versions use cash + marketable securities + receivables in the numerator.
What's a good quick ratio?
Generally 1.0 or higher, meaning liquid assets can cover current liabilities without relying on inventory sales.
What's the difference between the quick ratio and the current ratio?
The current ratio includes all current assets; the quick ratio excludes inventory, making it a stricter liquidity test.