Quick Summary
Quick Ratio measures ability to pay short-term obligations without relying on inventory sales.
The Quick Ratio, also known as the Acid-Test Ratio, is a liquidity ratio that measures a company's ability to pay short-term obligations with its most liquid assets. It excludes inventory from current assets.
Quick Ratio Formula
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Or
Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities
Example
If a company has:
- Current Assets: ₹150 lakhs
- Inventory: ₹60 lakhs
- Current Liabilities: ₹100 lakhs
Quick Ratio = (₹150 - ₹60) / ₹100 = ₹90 / ₹100 = 0.9
Interpretation
- Ratio > 1: Can pay all current liabilities without selling inventory
- Ratio = 1: Liquid assets exactly cover current liabilities
- Ratio < 1: Depends on inventory sales to meet obligations
- Ideal range: 1:1 or higher
When to Use Quick Ratio
- Inventory is slow-moving or obsolete
- Industry with rapid inventory obsolescence (technology, fashion)
- More conservative liquidity assessment needed
- Comparing companies with different inventory turnover
Key Points
- Also called Acid-Test Ratio
- Excludes inventory from current assets
- More stringent than Current Ratio
- Ideal minimum: 1:1
- Better for inventory-heavy businesses