The quick ratio, or acid-test, measures liquidity using only the most liquid current assets, excluding inventory, divided by current liabilities.
The quick ratio is a stricter cousin of the current ratio. It divides liquid current assets (cash, receivables, and marketable securities, but not inventory or prepaids) by current liabilities. By excluding inventory, which can be slow or difficult to sell, it tests whether a business could meet its obligations without relying on selling stock.
A quick ratio near or above 1.0 suggests solid short-term liquidity. It is especially informative for businesses with large or slow-moving inventory, where the current ratio can look healthier than the company's true ability to pay its bills.
A company has $100,000 in current assets including $40,000 of inventory, against $70,000 of current liabilities. Its quick ratio is ($100,000 − $40,000) ÷ $70,000 = 0.86, weaker than its current ratio suggests.
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