What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Quick ratio

Also called the "acid-test ratio", the quick ratio is one of several measures used to look at the financial health of a company. It is defined as:

<math>Quick\ ratio = \frac{current\ assets - inventory}{current\ liabilities}</math>

Expanded Definition

There are several ratios used to look at the liquidity of a company. That is, how well can the company can meet its day-to-day operational obligations (its bills). The current ratio uses all of the current assets, including inventory, cash, and accounts payable. The least liquid of these is inventory -- that is, it would take the longest to convert it into cash.

The quick ratio, on the other hand, is looking at how much liquidity the company could lay its hands on in a very short time. It is much more stringent. An acid-test, if you will, thus the alternate name. Inventory, being the least liquid of the current asset, is excluded from this ratio. However, it is not quite as stringent as the cash ratio, which uses just cash and marketable securities.

For example, if current assets is $18 million, inventory is $3 million, and current liabilities is $6 million, then the quick ratio would be ($18 - $3) / $6 = 2.5. In contrast, the current ratio would be 3.0 (that is, $18 / $6).

You'd like to see a value of 1.0 or higher. The stronger the company's liquidity position, the higher this ratio will be. Note, however, that different industries have different "normal" ranges, so don't compare a retailer to a utility, for example.

Related Terms

Recent Mentions on Fool.com

Advertisement