Definition
The quick ratio, also called the acid-test ratio, divides quick assets (cash, short-term investments and receivables) by current liabilities. It leaves out inventory and prepayments because they may not turn into cash quickly. A quick ratio of 1 or more means a business can pay its short-term obligations without selling any stock.
How it works
The quick ratio is a stricter test than the current ratio. It matters most for businesses with slow-moving or seasonal inventory, where a healthy current ratio can hide a cash problem.
Receivables count only if they are collectible: deduct the allowance for doubtful debts first. Track the ratio over time with the financial ratio calculator rather than judging a single number.
Formula
Quick ratio = (Cash + Short-term investments + Receivables) / Current liabilities
Quick ratio = (Current assets - Inventory - Prepayments) / Current liabilities
Example: quick ratio versus current ratio
Using the distributor from the current ratio example, quick assets are cash 40,000 plus receivables 90,000 = 130,000. Divided by current liabilities of 160,000 the quick ratio is 0.81, much lower than the current ratio of 1.56, because most current assets are inventory.