Test your immediate ability to pay short-term debts using only liquid assets
Liquid Assets
Current Liabilities
Quick Ratio (Acid-Test)
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What is the Quick Ratio?
The Quick Ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. Unlike the Current Ratio, it ignores Inventory and Prepaid Expenses because these cannot be converted into cash instantly at their book value. The formula is: $$Quick\ Ratio = \frac{Cash + Marketable\ Securities + Receivables}{Current\ Liabilities}$$
- The Benchmark: A Quick Ratio of 1.0 or higher is generally considered healthy. It means you have $1 of liquid cash for every $1 of debt.
- Inventory Heavy Businesses: If your Current Ratio is high but your Quick Ratio is low, your cash is dangerously "trapped" in unsold stock.
- Immediate Solvency: This is the ratio creditors look at to see if you could survive a sudden "bank run" or a total halt in sales.
Why exclude inventory? +
In an emergency, selling inventory often requires heavy discounting (liquidation prices), and it takes time to find buyers. Cash and receivables are much closer to "ready money."
Is a ratio of 5.0 better than 1.0? +
Not necessarily. A very high ratio might mean you are holding too much idle cash that could be reinvested into the business to generate more growth.
What if my ratio is below 1.0? +
It indicates a potential liquidity crunch. You may need to speed up your invoice collections, negotiate longer payment terms with suppliers, or secure a line of credit.
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