Quick Ratio
In short
Like current ratio but excludes inventory — stricter liquidity test
Same as current ratio but removes inventory (stuff you haven't sold yet) from the assets side. If a company has $150 in cash and receivables, $50 in inventory, and $100 in current liabilities, its current ratio is 2.0 but its quick ratio is only 1.5 — a stricter test because inventory can be slow or hard to sell in a crisis.
The quick ratio (acid-test ratio) divides quick assets — cash, marketable securities, and accounts receivable — by current liabilities, deliberately excluding inventory and prepaid expenses. It answers a narrower question than the current ratio: could the company cover near-term obligations without selling inventory first? That distinction matters most where inventory is slow-moving, perishable, or has to be discounted to move quickly — retailers, manufacturers, and homebuilders, for example. A ratio persistently below 1 doesn't necessarily mean insolvency, but it does mean the company is leaning on selling inventory or raising financing to cover short-term liabilities. A wide gap between the current ratio and quick ratio signals inventory makes up a large share of current assets.
Formula
Quick Ratio = (Current Assets - Inventory) ÷ Current LiabilitiesThresholds
- <0.5
- Liquidity risk
- 0.5-1
- Tight but manageable
- 1-2
- Healthy
- >2
- Very liquid
Related concepts
- Current Ratio — If you have $200 in the bank and $100 in bills due this month, your current ratio is 2.0. Above 1 means the company can pay its near-term debts.
- Debt-to-Equity Ratio — If a company has $50 in debt and $100 in shareholder equity, D/E is 0.5. Higher means more leveraged — good in boom times, dangerous in downturns.