Quick Ratio

Definition

The quick ratio is a measure of a company's ability to meet its short-term obligations using its most liquid assets (near cash or quick assets). Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. Quick ratio is viewed as a sign of a company's financial strength or weakness; it gives information about a company’s short term liquidity. The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice.

The quick ratio is also known as the acid-test ratio or quick assets ratio.

Calculation (formula)

The quick ratio is calculated by dividing liquid assets by current liabilities:

Quick ratio = (Current Assets - Inventories) / Current Liabilities

Calculating liquid assets inventories are deducted as less liquid from all current assets (inventories are often difficult to convert to cash). All of those variables are shown on the balance sheet (statement of financial position).

Alternative and more accurate formula for the quick ratio is the following:

Quick ratio = (Cash and cash equivalents + Marketable securities + Accounts receivable) / Current Liabilities

The formula's numerator consists of the most liquid assets (cash and cash equivalents) and high liquid assets (liquid securities and current receivables).

Norms and Limits

The higher the quick ratio, the better the position of the company. The commonly acceptable current ratio is 1, but may vary from industry to industry. A company with a quick ratio of less than 1 can not currently pay back its current liabilities; it's the bad sign for investors and partners.

Exact Formula in the ReadyRatios Analytic Software (based ontheIFRS statement format).

Quick ratio = (F1[CashAndCashEquivalents]+ F1[OtherCurrentFinancialAssets]+ F1[TradeAndOtherCurrentReceivables])/ F1[CurrentLiabilities] 

F1 – Statement of financial position (IFRS).