What Is the Quick Ratio?
The quick ratio, also known as the acid-test ratio, measures whether a company can pay its short-term liabilities using only its most liquid assets: cash, marketable securities, and accounts receivable. It deliberately excludes inventory, which can take months to sell and may fetch far less than book value in a pinch.
Because it strips out the least liquid current asset, the quick ratio is a tougher, more conservative test than the current ratio. A quick ratio at or above 1.0x is the traditional comfort threshold.
Formula and Interpretation
The formula is Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. An equivalent shortcut is (Current Assets - Inventory) / Current Liabilities.
The gap between a company's current ratio and quick ratio reveals how dependent it is on inventory. A retailer might show a solid current ratio of 1.8x but a quick ratio of 0.5x, meaning its apparent liquidity relies almost entirely on selling merchandise, which is a risk if demand suddenly drops.
Example
Suppose a company holds $40 million of cash, $10 million of marketable securities, and $70 million of accounts receivable, with $100 million of current liabilities. Its quick ratio is ($40 million + $10 million + $70 million) / $100 million = 1.2x. Even if it could not sell any inventory at all, it could still cover its near-term obligations with room to spare.
Why It Matters
The quick ratio matters most in stress scenarios, exactly when inventory becomes hardest to convert to cash. Credit analysts lean on it when evaluating borrowers in cyclical or fashion-driven industries where inventory values can evaporate quickly.
Comparing the quick ratio across peers and over time helps analysts spot deteriorating liquidity early, often before it shows up in earnings or triggers a covenant breach.
