Financial Statement Analysis Magazine Section

Ratio - Quick Ratio | Acid Test Ratio

Quick RatioQUICK RATIO:                                                                           onlinecalculator iconOnline Quick Ratio Calculator

Also known as the Acid Test Ratio. This ratio is obtained by dividing the 'Total Quick Assets' of a company by its 'Total Current Liabilities'. The term 'Quick' denotes Quick sources of Cash! Sometimes a company could be carrying heavy inventory as part of its current assets, which might be obsolete or slow moving. Thus eliminating inventory from current assets and then doing the liquidity test is measured by this ratio. The ratio is regarded as an acid test of liquidity for a company. It expresses the true 'working capital' relationship of its cash, accounts receivables, prepaids and notes receivables available to meet the company's current obligations. It is a primary test of a company's ability to pay its bills.

A Quick Ratio is a more rigid test of a company's liquidity than the Current Ratio since it excludes inventory. A company with a Quick Ratio of less than 1 would mean that the company will not be able to pay their current liabilities and should trigger a more thorough analysis of the financial condition of such a business. 

The formula:

Quick Ratio = Total Quick Assets/ Total Current Liabilities

Where:

Quick Assets = Cash & Equivalents + Marketable Securities + Accounts Receivable

or Alternatively:

Quick Assets = Total Current Assets (minus) Inventory 

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