Quick Ratio (Acid Test)
A stricter liquidity test that excludes inventory, which can be slow to convert to cash.
Formula
Variables
Example
($150k − $60k) / $75k = 1.2
How it works
The quick ratio measures whether a business can cover its short-term debts using only its most liquid current assets, leaving out inventory because stock may take time to sell and convert into cash. It is stricter than the current ratio because it focuses on assets that are more readily available to pay bills due soon. A result above 1 suggests quick assets exceed current liabilities, while a result below 1 may signal tighter short-term liquidity.
When to use it
Use this ratio when you want a conservative check of short-term solvency, especially for firms where inventory is slow-moving or uncertain in value, such as retail, manufacturing, or seasonal businesses. It is also useful for lenders, investors, and managers comparing a company’s ability to meet immediate obligations without relying on sales of stock.
Worked example, step by step
Current assets = $420,000 Inventory = $150,000 Current liabilities = $180,000 Quick assets = Current assets - Inventory Quick assets = $420,000 - $150,000 = $270,000 Quick ratio = Quick assets / Current liabilities Quick ratio = $270,000 / $180,000 = 1.5 Answer: The quick ratio is 1.5, meaning the company has $1.50 of highly liquid assets for every $1 of current liabilities.
Common mistakes to avoid
- Including inventory in the numerator, which turns it into a less strict liquidity measure
- Using total liabilities instead of current liabilities
- Forgetting that the ratio is based on liquid assets, so cash, receivables, and other quick assets matter more than stock on hand
Did You Know?
The name “acid test” comes from the fast, decisive gold-purity test of the same name.
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BasicThe foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.
Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
Gross Profit
BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
Net Income
BasicThe “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
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BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.