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Understand the Quick Ratio to explore how businesses measure their ability to meet short-term obligations with liquid assets.
The Quick Ratio, also known as the Acid-Test Ratio, is a financial metric used to evaluate a company’s ability to meet its short-term liabilities using only its most liquid assets. Unlike the current ratio, which includes inventory and other less-liquid assets, the quick ratio focuses solely on assets that can be rapidly converted into cash. This makes it one of the most reliable measures of short-term liquidity and financial resilience.
A high quick ratio indicates that a company can cover its immediate obligations without relying on selling inventory or obtaining additional financing. A low quick ratio suggests potential liquidity stress, especially in challenging market conditions where converting inventory into cash may take time.
The Quick Ratio measures a company’s capability to pay off its short-term liabilities using only quick assets—those which can be converted to cash within 90 days.
Quick assets typically include:
Cash and cash equivalents
Accounts receivable
The quick ratio excludes inventory and prepaid expenses because they cannot be instantly liquidated. This ratio helps bankers, investors, and analysts understand whether a company is financially stable enough to handle sudden cash demands.
A quick ratio of 1:1 indicates that the company has one rupee of quick assets for every rupee of short-term liability. Ratios significantly below 1 may reflect a cash crunch, while ratios far above 1 may indicate underutilised assets.
The Quick Ratio can be calculated in two common ways:
Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) ÷ Current Liabilities
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities
Cash & Cash Equivalents: Immediate liquidity
Marketable Securities: Easily sellable financial instruments
Accounts Receivable: Expected near-term cash inflow
Current Liabilities: Obligations due within one year
Example:
A company has:
Cash: ₹80,000
Marketable Securities: ₹40,000
Accounts Receivable: ₹60,000
Inventory: ₹120,000
Prepaid Expenses: ₹20,000
Current Liabilities: ₹1,50,000
Quick Assets = 80,000 + 40,000 + 60,000 = ₹1,80,000
Quick Ratio = 1,80,000 ÷ 1,50,000 = 1.2
Interpretation:
A quick ratio of 1.2 means the company has ₹1.20 in liquid assets for every ₹1 of current liabilities, indicating strong short-term liquidity.
Here’s how the two liquidity ratios differ at a glance:
| Feature | Quick Ratio | Current Ratio |
|---|---|---|
Includes Inventory |
No |
Yes |
Includes Prepaid Expenses |
No |
Yes |
Measures |
Immediate liquidity |
Overall short-term liquidity |
Accuracy |
More conservative |
Less conservative |
Typically Used For |
Assessing ability to meet urgent liabilities |
General liquidity assessment |
The quick ratio provides a stricter test of liquidity, while the current ratio offers a broader view. For companies with slow-moving inventory or long cash cycles, the quick ratio can offer a view of liquidity that focuses on highly liquid assets
Here are the key advantages of the quick ratio:
Highly Reliable Indicator: Excludes inventory, providing a focused measure of immediate liquidity.
Useful in Crisis Assessments: Helps determine whether a company can withstand sudden cash demands.
Important for Credit Evaluation: Banks and lenders frequently use it before approving loans.
Signals Operational Efficiency: High ratios show disciplined receivables and strong cash management.
Reduces Manipulation: Harder to distort compared to metrics involving inventory valuation.
Here’s what may restrict the ratio’s effectiveness:
Ignores Inventory Value: For inventory-heavy businesses (retail, manufacturing), this may understate liquidity.
May Overstate Strength: High receivables do not guarantee quick collection.
Snapshot-Based: It represents one moment in time and may not reflect month-to-month liquidity fluctuations.
Industry Variations: Quick ratio levels vary across sectors, making cross-industry comparisons ineffective.
Does Not Consider Cash Flow Timing: Liabilities may be due before receivables are collected.
The Quick Ratio is a key liquidity measure that shows how well a company can meet short-term obligations using only its most liquid assets. It offers a conservative view of financial strength, but its usefulness increases when interpreted with industry context, cash flow behaviour, and the quality of receivables. Combining it with other metrics ensures a clearer understanding of overall liquidity.
Key Points to Remember:
Shows liquidity using only quick assets
Offers a conservative view of short-term financial health
Should be assessed against industry norms and cash flow patterns
More informative when reviewed alongside other liquidity and operational metrics
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The quick ratio is also referred to as the acid-test ratio because it evaluates how well a business can meet short-term obligations using only its most liquid assets.
The quick ratio measures immediate liquidity by using only quick assets such as cash, marketable securities, and receivables, whereas the current ratio uses all current assets, including inventory and other less liquid items.
The quick ratio is calculated using the formula:
(Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities.
This shows the company’s ability to settle short-term liabilities without relying on inventory.
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