Quick Ratio
Stringent liquidity measure excluding inventory.
Formula
Variables
Example
Acid-test ratio
How it works
The quick ratio compares the assets a business can turn into cash very quickly with the debts it must pay soon. Inventory is left out because stock may take time to sell and may not convert to cash at full value, so this ratio gives a stricter test of short-term financial strength than the current ratio. A value above 1 suggests the company could cover its immediate liabilities without relying on selling inventory, though the ideal level depends on the industry.
When to use it
Use this ratio when judging whether a business can meet urgent bills from cash, receivables, and other highly liquid assets. It is especially useful for lenders, investors, and managers reviewing companies where inventory is slow-moving or uncertain in value.
Worked example, step by step
Step 1: Identify current assets = $480,000 Step 2: Identify inventory = $120,000 Step 3: Identify current liabilities = $240,000 Step 4: Plug into the formula: QR = (Current Assets - Inventory) / Current Liabilities Step 5: QR = ($480,000 - $120,000) / $240,000 Step 6: QR = $360,000 / $240,000 Step 7: QR = 1.5 Final answer: The quick ratio is 1.5, meaning the company has $1.50 of liquid assets for every $1 of short-term liabilities.
Common mistakes to avoid
- Including inventory in the numerator, which makes the measure less strict
- Using total liabilities instead of only current liabilities
- Forgetting to subtract inventory from current assets before dividing
Did You Know?
The quick ratio strips out inventory to test whether a firm can pay bills using only its most liquid assets.
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Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
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