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Quick Ratio (Acid Test)
A conservative liquidity ratio excluding inventory, showing ability to pay immediate obligations with liquid assets.
Formula
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Or: Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities
Definition
What is Quick Ratio?
Quick ratio (also called acid test) measures the ability to pay current liabilities without relying on inventory sales. It's more conservative than current ratio because inventory can be slow or difficult to liquidate.
Quick Ratio Standards
A ratio of 1.0 or higher is generally healthy, meaning you can cover all current liabilities with liquid assets. Below 1.0 may require selling inventory or securing additional financing to meet obligations.
When to Use Quick Ratio
Use quick ratio for businesses with significant inventory (ecommerce, retail) where the current ratio might overstate liquidity. For service or SaaS businesses with minimal inventory, current ratio and quick ratio will be similar.
Example
Ecommerce company balance sheet:
- Cash: $80,000
- Receivables: $40,000
- Inventory: $200,000
- Current Liabilities: $150,000
Current Ratio = $320K / $150K = 2.13 (looks healthy)
Quick Ratio = ($80K + $40K) / $150K = 0.80 (potential issue)
Without selling inventory, company can't cover all current debts.
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