Definition
Quick Ratio (Acid-Test)
The quick ratio measures a company's ability to meet short-term liabilities with its most liquid assets, excluding inventory from current assets.
Calculated as current assets minus inventory, divided by current liabilities, the quick ratio is a stricter liquidity test than the current ratio because inventory can be hard to convert to cash quickly. A ratio of one or above generally indicates comfortable short-term liquidity.
The quick ratio is especially relevant for businesses where inventory is slow-moving or perishable. Comparing it with the current ratio shows how dependent a company's apparent liquidity is on selling stock, which matters when assessing its ability to weather a cash crunch.
Related terms
- Current RatioThe current ratio measures a company's ability to pay short-term obligations using its short-term assets.
- Cash Conversion CycleThe cash conversion cycle measures how many days it takes a company to turn investments in inventory and receivables back into cash.
- Inventory Turnover RatioThe inventory turnover ratio measures how many times a company sells and replaces its inventory over a period, indicating how efficiently stock is managed.
- Working Capital CycleThe working capital cycle is the time it takes a company to convert its investment in inventory and receivables back into cash, net of payables.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.