Moneyzine
Contents
/Investment Guides /Quick Ratio

Quick Ratio

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
September 21st, 2023
Advertiser Disclosure

Definition

Also known as the acid test, the quick ratio is a measure of liquidity, which is the ability of a company to pay its short term debt obligations using a subset of current assets known as quick assets. The calculation of the quick ratio requires information found on a company's balance sheet.

Calculation

Quick Ratio = Quick Assets / Current Liabilities

Where

  • Quick Assets = Current Assets - Inventories - Prepaid Expenses

Explanation

Since prepaid expenses and inventories are more difficult to convert into cash than other current assets (cash, marketable securities, accounts receivable), a ratio known as the Quick Ratio, is sometimes used by analysts and investors to supplement the current ratio. A quick ratio of 1.0 or better is considered satisfactory. When the ratio is greater than 1.0, a company can easily satisfy current liabilities using their quick assets.

When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.

Example

Company A's balance sheet indicates current assets of $12,240,000, inventories of $3,416,000 and prepaid expenses of $1,277,000. Total current liabilities were found to be $5,441,000.

Using the above formula, the quick ratio would be:

= ($12,240,000 - $3,416,000 - $1,277,000) / $5,441,000 = $7,502,000 / $5,441,000, or 1.38

In this example, Company A's quick ratio is well above 1.0, which is considered satisfactory.

Related Terms

liquidity ratio, current ratio, acid test, quick assets, cash ratio, defensive-interval ratio

Explore Investing Further

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • DRIP Brokers: Best Brokers for Dividend Investing for November 2024
    Reinvesting dividends could mean compound growth for your portfolio. But reinvesting them manually can be a hassle. This is why you could benefit from a dividend reinvestment plan (DRIP).
    March 12th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    March 6th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.