Liquidity ratio excluding inventory and prepaids to focus on near-cash coverage of current liabilities.
The quick ratio measures whether a company can cover its short-term liabilities using only its most liquid short-term assets.
It is often called the acid-test ratio because it is stricter than the current ratio.
In practice, analysts also express it as:
The current ratio gives credit to all current assets. The quick ratio does not.
That matters because inventory may take time to sell, and prepaid expenses cannot be used to pay bills. The quick ratio focuses on assets that are much closer to cash.
For that reason, it is often more informative when a business carries a lot of inventory or when analysts want a tougher liquidity test.
Quick assets usually include:
cash
cash equivalents
marketable securities
accounts receivable
They usually exclude:
inventory
prepaid expenses
other current assets that are not easily turned into cash
The quick ratio asks a direct question:
If the company had to meet short-term obligations without relying on inventory sales, how prepared would it be?
above 1.0 often suggests stronger near-term coverage
below 1.0 can indicate more dependence on inventory turnover, refinancing, or continuing cash inflows
Industry context still matters. A retailer with very fast inventory turnover may operate with a lower quick ratio than a business with slower-moving stock.
Suppose a company has:
cash of $120,000
marketable securities of $30,000
accounts receivable of $250,000
current liabilities of $500,000
That means the company has $0.80 of quick assets for each $1.00 of short-term liabilities.
The business may still be fine, but it is more exposed if collections slow down or if it cannot convert inventory into cash quickly enough.
The current ratio includes all current assets.
The quick ratio removes inventory and prepaids.
The cash ratio is even stricter because it looks only at cash and near-cash resources.
That progression helps analysts judge how dependent reported liquidity is on inventory sales and receivable collection.
The quick ratio is stricter than the current ratio, but it is still not perfect.
It assumes receivables are collectible on time. If customers are slow to pay, the quick ratio may still overstate real liquidity. That is why analysts often pair it with days sales outstanding (DSO) and accounts receivable turnover.
Current Ratio: The broader liquidity ratio that includes inventory.
Cash Ratio: The strictest liquidity ratio because it focuses only on cash and near-cash assets.
Working Capital: The absolute short-term asset cushion after subtracting current liabilities.
Accounts Receivable Turnover: Helps judge how quickly receivables turn into cash.
Liquidity: The broader concept the quick ratio tests conservatively.