Quick Ratio

Liquidity ratios Print Email

Quick ratio definition

The quick ratiob 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).

Quick ratio 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).

Industry benchmark

Average values for quick ratio you can find in our industry benchmarking reference book.

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Quote Guest, 15 April, 2013
How do I find out the industry standards to know if my ratios are on par?
Quote Guest, 19 April, 2013
How to calculate Quick ratio if Inventory is greater than Current Assets? For example :
Inventory (stock) at 1 May 2009 - $ 20000
Inventory (stock) at 30 April 2010 - $60000
Trade receivables (debtors) - $16000
Trade payables (creditors) - $35000
Loans repayable within 12 months (Bank Overdraft) - $5000
Quote Guest, 28 June, 2013
How can Inventory > Current Assets?
Inventory is under Current Assets.
CA = Inventory +Debtors = 76 000
C. liabilities = Creditors + Loans =40 000. So, quick ratio = (CA-Inventories )/CL = 16000/40 000 = 0.4
Quote Guest, 23 November, 2013
do u include prepayments also?
Quote Guest, 4 April, 2014
Quote
Guest wrote:
How to calculate Quick ratio if Inventory is greater than Current Assets? For example :
Inventory (stock) at 1 May 2009 - $ 20000
Inventory (stock) at 30 April 2010 - $60000
Trade receivables (debtors) - $16000
Trade payables (creditors) - $35000
Loans repayable within 12 months (Bank Overdraft) - $5000
Quote Guest, 27 November, 2014
God richly bless you all for this information.it has
really helped me in my research work. thanks
Quote Magi, 7 May, 2015
This is useful in preparing my assignment.!!!
Thank you so much!!!
Quote Guest, 11 May, 2015
Very helpful for my assignment. Really thanks to this website :)
Quote Guest, 12 July, 2015
thank you much for this information which is presented in understandable way in order for me to complete my research.
Quote Guest, 23 December, 2016
The ratio has been broken down to very easy and understandable terms, it makes Financial Accounting easy for me, this info is truly priceless, Thank you for sharing this!
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