Definition of Quick Ratio
The quick ratio is a financial ratio used to gauge a company’s liquidity. The quick ratio is also known as the acid test ratio.
The quick ratio compares the total amount of cash and cash equivalents + marketable securities + accounts receivable to the amount of current liabilities.
Example of Quick Ratio
If a company’s cash and cash equivalents + marketable securities + accounts receivable adds up to $1,000,000 and the amount of the company’s current liabilities is $1,200,000, its quick ratio is 0.83 to 1 ($1,000,000/$1,200,000 = 0.83).
The quick ratio differs from the current ratio in that some current assets are excluded from the quick ratio. The most significant current asset that is excluded is inventory. The reason is that inventory might not be “quick” to turn to cash.
