Quick Ratio

Article byDheeraj Vaidya, CFA, FRM

What Is Quick Ratio?

The quick ratio, also known as the acid test ratio, measures the ability of the company to repay the short-term debts with the help of the most liquid assets. . It is also called the acid test ratio or liquid ratio.

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It is calculated by adding total cash and equivalents, accounts receivable, and the marketable investments of the company and then dividing it by its total current liabilities. It helps the investors estimate the company’s ability to clear out its current liabilities at the earliest or meet its obligations for the short term.

Key Takeaways

  • The quick ratio is also known as the acid test ratio. It determines the company’s ability to repay short-term debts with the help of the most liquid assets. 
  • One may calculate it by adding total cash and equivalents, accounts receivable, and the company’s marketable investments. Then divide it by its total current liabilities.
  • Current assets may contain a large inventory and prepaid expenses and may not be liquid. Thus, including stock may alter the current ratio from an immediate liquidity point of view. The quick ratio solves the problem by not considering inventory. 

Quick Ratio Explained

Quick Ratio helps stakeholders measure an entity’s capacity to pay off its short term obligations by using its liquid assets like cash, accounts receivable and marketable securities.

It should be noted that current assets may contain a large inventory, and prepaid expenses may not be liquid. Therefore, including stock, such items will skew the current ratio from an immediate liquidity point of view. Quick ratio solves this problem by not taking inventory into account. To calculate quick ratio only the most liquid assets, including money and cash equivalents, and receivables are considered.

A higher than the average industry ratio may imply that the company is investing too much of its resources in the business’s working capital, which may be more profitable elsewhere. However, if the quick ratio is lower than the industry average, the company is taking a high risk and not maintaining adequate liquidity.

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Quick Ratio Explanation in Video



Let us understand the formula used to calculate the quick ratio.

Quick Ratio Formula = Quick Assets / Quick Liabilities. = (Cash and Cash EquivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more + Accounts Receivables) / (Current liabilities – Bank Overdraft)

A ratio of 1: 1 indicates a highly solvent position. This ratio serves as a supplement to the current ratio in analyzing liquidity.

Due to the prohibition of inventory from the formula, this ratio is a better sign than the current ratio of the ability of a company to pay its instant obligations. It is also known as the acid test ratio or liquid ratio.

Calculation Examples

The following examples will help understand the concept.

Example #1

The following is the information extracted from audited records at a large industrial company. (Amount in $)

Current Assets1,10,00090,00080,00075,00065,000
Current Liabilities66,00070,00082,0001,00,0001,00,000
Bank Overdraft6,0005,0002,00000

Assume that Current Assets = Cash and Cash Equivalents + Accounts ReceivablesAccounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more + Inventory. There are no other items included in current assets.

An ideal quick ratio You must calculate the quick ratio and will help to analyze the ratio trend to judge the company’s short-term liquidity and solvency.

Answer to Example 1.

Calculation of the quick ratio of the company for the following years: by using the quick ratio accounting formula.

Current assets ( A )1,10,00090,00080,00075,00065,000
Less: Inventory (B)8,00012,0008,0005,0005,000
Quick Assets (C) = (A – B )1,02,00078,00072,00070,00060,000
Current Liabilities ( D )66,00070,00082,00080,00080,000
Less: Bank overdraft ( E )6,0005,0002,00000
Quick Liabilities (F) = (D – E)60,00065,00080,00080,00080,000
Quick Ratio = ( C ) / ( F )

(Amount in $)

From the above-calculated data, we analyzed that the quick ratio has fallen from 1.7 in 2011 to 0.6 in 2015. It must mean that most the current assetsThe Current AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more are locked up in stocks over time. The ideal standard quick ratio is 1: 1, which means that the company is not in a position to meet its immediate current liabilities; it may lead to technical solvency. Hence, one should take steps to reduce the investment in the inventory and see that the ratio is above level 1: 1.

The ideal standard ratio is 1: 1. However, the company is not in a position to meet its immediate current liabilities; it may lead to technical solvency. Hence, one should take steps to reduce the investment in the inventory and see that the ratio is above level 1: 1.

Example #2

XYZ Ltd. provides you with the following information for the year ending 31st March 2015: –

  • Working Capital = $45,000
  • Current ratio = 2.5
  • Inventory = $40,000

Here the quick ratio accounting formula is used to calculate and interpret  It.

Answer to Example 2

  • Calculation of current assets and current liabilities

Working capital = $45,000

Current ratio = 2.5

= Current assets / Current liabilities = 2.5 = Current assets = 2.5 * Current Liabilities

So, working capital = Current Assets – Current Liabilities

= 45,000

= 2.5 Current Liabilities – current liabilities

= 1.5 * current liabilities = 45,000

Current liabilities = 45,000 / 1.5 = 30,000

Therefore, current assets = 2.5 * current liabilities = 2.5 * 30,000 = 75,000

So, current assets and liabilities are $75,000 and $30,000, respectively.

  • Calculation of acid test ratio

Given Inventory = $40,000

Current assets = $75,000

So, Quick assets = Current assets – Inventory = $75,000 – $40,000 = $35,000

As no bank overdraft is available, current liabilities will be considered quick liabilities.

So, the quick liabilities = $30,000


Ratio = Quick assets / Quick liabilities

Ratio = $35,000 / $30,000

Ratio = 1.167

As the calculated acid test ratio is 1.167, which is more than the ideal ratio of 1, the company can better meet its obligation through quick assets.

Example #3

P&G’s current ratio was healthy at 1.098x in 2016. However, its quick ratio is 0.576x. It implies that many of P&G’s current assets are stuck in lesser liquid assets like inventory or prepaid expenses.




This ratio is one of the major tools for decision-making. It previews the ability of the company to make a settlement of its quick liabilities in a very short notice period.

Quick Ratio Vs Current Ratio

Quick ratio analysis interprets the company’s ability to meet short-term obligations by using liquid assets without inventory whereas the current ratio takes inventory into consideration. However, let us understand the differences between them.

Quick RatioCurrent Ratio
It does not include inventory in its calculation.It includes inventory in its calculation.
It divides cash, account receivable, and marketable securities by current liabilities.It divides all current assets by current liabilities.
It is a very stringent approach.This approach is more relaxed.
It takes into account assets that can be converted to cash in 90 days or less.It takes into account assets that can be converted to cash in a year.

Frequently Asked Questions (FAQs)

How to improve the quick ratio?

One is to improve the quick ratio by increasing sales and inventory turnover. Moreover, they may also opt for discounting, increasing marketing, and providing incentives to the sales staff may also be used to boost sales. However, as a result, it will increase inventory turnover.

Is quick ratio a percentage?

The quick ratio is mentioned as a number rather than a percentage. It is because the number determines the liquid assets available for the corresponding current liabilities.

What quick ratio is good?

An excellent quick ratio is above one or 1:1. A percentage of 1:1 means the company has similar liquid assets as current liabilities. A higher ratio means the company may pay off current liabilities several times.

Is the quick ratio the same as the acid test?

The quick ratio determines a company’s current assets by its current liabilities. The acid test ratio is more rigid than the quick ratio as it does not remove inventory from existing assets. Instead, the stock may be sold shortly to pay the company’s

Guide to what is Quick Ratio. We explain its formula, vs current ratio along with interpretation, examples, and importance. You may also have a look at these articles for enhancing your knowledge of accounting:

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