Quick Ratio — Investment Wiki

The Quick Ratio, often called the Acid-Test Ratio, is an extremely stringent liquidity metric. It measures a company's ability to pay off all its short-term liabilities right now, using only its most liquid assets—cash, equivalents, and accounts receivable.

Quick Reference

Type	Liquidity Ratio
Formula	(Cash + Receivables) ÷ Current Liabilities
Safe Target	> 1.0
Danger Zone	< 0.5

1.0 The Formula

Basic Form

formulaQuick Ratio = (Cash & Equivalents + Marketable Securities + Accounts Rec.) / Current Liab.
Alternatively: (Current Assets - Inventory) / Current Liabilities

Unlike the Current Ratio, the Quick Ratio notoriously strips out Inventory. This is because inventory cannot be guaranteed to sell tomorrow for cash. If a recession hits, inventory rots on the shelves, rendering it useless for paying off immediate debts.

If a company has a Current Ratio of 2.0 but a Quick Ratio of 0.4, it means the company's "safety net" is entirely tied up in unsold inventory. They are highly illiquid.

2.0 Interpretation & Edge Cases

A Quick Ratio > 1.0 means the company can endure a total collapse in revenue and instantly pay off all its short-term debts using the cash it has on hand. A sustained Quick Ratio < 1.0 means the company is permanently reliant on tomorrow's revenue or continuous borrowing to pay today's bills.

3.0 Related Pages

Current Ratio

The looser cousin of the Quick Ratio that includes inventory in the calculation.