What is the Quick Ratio (Acid Test)?
The Quick Ratio is a stricter liquidity test than Current Ratio. It excludes inventory because inventory cannot always be quickly converted to cash. Only the most liquid assets count: cash, marketable securities, and accounts receivable.
Why Quick Ratio Matters
For ecommerce founders, the difference between Current Ratio and Quick Ratio reveals how much liquidity depends on inventory. If Current Ratio is 2.0 but Quick Ratio is 0.8, most of your liquidity is trapped in stock that might not sell quickly.
For SaaS companies without inventory, Quick Ratio and Current Ratio are often identical, which simplifies analysis.
The Acid Test Standard
A Quick Ratio of 1.0 or higher means you can cover all short-term obligations without selling any inventory. This is the minimum healthy threshold for most businesses.
Formula
Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities
Or: Quick Ratio = (Cash + Marketable Securities + Receivables) ÷ Current Liabilities
Example
Your ecommerce company has:
- Cash: $200,000
- Receivables: $100,000
- Inventory: $400,000
- Current Liabilities: $350,000
Quick Ratio = ($200,000 + $100,000) ÷ $350,000 = 0.86
Without selling inventory, you cannot cover all short-term obligations. This signals a liquidity risk that needs attention.