Definition:
The Quick Ratio, also known as the Acid-Test Ratio, is a liquidity ratio that measures a company's ability to pay its short-term liabilities using only its most liquid assets. Unlike the Current Ratio, it excludes inventory and prepaid expenses, as these assets cannot always be converted into cash quickly.
A higher Quick Ratio indicates stronger short-term financial health and a better ability to meet immediate obligations without relying on inventory sales.
Formula
Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) ÷ Current Liabilities
OR
Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities
Example
Step 1: Identify Current Assets
Current Assets | Amount (₹ lakh) | Included in Quick Ratio? |
Cash & Cash Equivalents | 80 | ✅ Yes |
Marketable Securities | 20 | ✅ Yes |
Accounts Receivable | 100 | ✅ Yes |
Inventory | 150 | ❌ No |
Prepaid Expenses | 10 | ❌ No |
Total Quick Assets | 200 |
Step 2: Identify Current Liabilities
Current Liabilities | Amount (₹ lakh) |
Accounts Payable | 90 |
Short-term Borrowings | 40 |
Accrued Expenses | 20 |
Taxes Payable | 10 |
Total Current Liabilities | 160 |
Step 3: Apply the Formula
Quick Ratio = Quick Assets ÷ Current Liabilities
= ₹200 lakh ÷ ₹160 lakh
= 1.25
Interpretation
The company has a Quick Ratio of 1.25, meaning it has ₹1.25 of highly liquid assets for every ₹1 of short-term liabilities.
This indicates the company can comfortably meet its immediate financial obligations without relying on selling inventory, suggesting healthy short-term liquidity.
Why are Inventory and Prepaid Expenses Excluded?
Inventory may take time to sell and may not always be sold at its book value.
Prepaid expenses (such as prepaid rent or insurance) cannot be converted into cash to pay creditors.
Therefore, the Quick Ratio provides a more conservative measure of liquidity than the Current Ratio.
Definition:
The Quick Ratio, also known as the Acid-Test Ratio, is a liquidity ratio that measures a company's ability to pay its short-term liabilities using only its most liquid assets. Unlike the Current Ratio, it excludes inventory and prepaid expenses, as these assets cannot always be converted into cash quickly.
A higher Quick Ratio indicates stronger short-term financial health and a better ability to meet immediate obligations without relying on inventory sales.
Formula
Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) ÷ Current Liabilities
OR
Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities
Example
Step 1: Identify Current Assets
Current Assets | Amount (₹ lakh) | Included in Quick Ratio? |
Cash & Cash Equivalents | 80 | ✅ Yes |
Marketable Securities | 20 | ✅ Yes |
Accounts Receivable | 100 | ✅ Yes |
Inventory | 150 | ❌ No |
Prepaid Expenses | 10 | ❌ No |
Total Quick Assets | 200 |
Step 2: Identify Current Liabilities
Current Liabilities | Amount (₹ lakh) |
Accounts Payable | 90 |
Short-term Borrowings | 40 |
Accrued Expenses | 20 |
Taxes Payable | 10 |
Total Current Liabilities | 160 |
Step 3: Apply the Formula
Quick Ratio = Quick Assets ÷ Current Liabilities
= ₹200 lakh ÷ ₹160 lakh
= 1.25
Interpretation
The company has a Quick Ratio of 1.25, meaning it has ₹1.25 of highly liquid assets for every ₹1 of short-term liabilities.
This indicates the company can comfortably meet its immediate financial obligations without relying on selling inventory, suggesting healthy short-term liquidity.
Why are Inventory and Prepaid Expenses Excluded?
Inventory may take time to sell and may not always be sold at its book value.
Prepaid expenses (such as prepaid rent or insurance) cannot be converted into cash to pay creditors.
Therefore, the Quick Ratio provides a more conservative measure of liquidity than the Current Ratio.