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Quick Ratio |
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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Quick Ratio is the sum of cash, marketable securities and receivables, divided by current liabilities.
The Quick Ratio, also known as the acid test ratio, is the measure of a company's short-term liquidity. A higher quick ratio indicates better liquidity -- that is, a better ability to meet short-term obligations -- and vice versa. The general formula for quick ratio is
In essence, the quick ratio, is a conservative version of the current ratio as it only includes the most liquid of the current assets: cash, marketable securities and receivables. The ratio takes into account the fact that certain current assets -- such as pre-paid expenses, taxes -- have already been paid in advance and cannot be converted back into cash. It also discounts inventory as it cannot be easily converted into cash, and that a company may not be able to realize the full carrying value of the inventory if it were to sell it quickly.
Example
- Company A has $100 million in Current Assets and $50 million in Current Liabilities. The current assets include $10 million in receivables, $5 million in cash and $10 million in short-term marketable securities. Therefore, the company's quick ratio would be 0.5 ((10+5+10)/50).
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