What is Quick Ratio?
Quick Ratio (Acid Test) is like Current Ratio but excludes inventory. Shows if company can pay immediate obligations with most liquid assets.
Think of it like this
Emergency fund test: Bills are $3,000. You have $2,000 cash but $2,000 more in stuff to sell. Quick ratio only counts the $2,000 cash (0.67) - can you pay without selling stuff?
Formula
Quick Ratio = (Current Assets - Inventory) / Current Liabilities- Quick Assets: Cash, marketable securities, receivables
- Current Liabilities: Bills due within 1 year
Why it matters
- More conservative than current ratio
- Shows immediate liquidity
- Critical in crisis situations
- Important for companies with slow inventory
What's a good value?
< 0.5
Very Risky
Liquidity problems
0.5-1
Concerning
May struggle in crisis
1-1.5
Healthy
Can meet obligations
> 1.5
Strong
Excellent liquidity
Real-world example
Software company: Quick ratio 2.0 (no inventory). Retailer: Quick ratio 0.3 (heavy inventory). Service company: Quick ratio 1.2 (mostly receivables).
Things to watch out for
- Receivables might be uncollectable
- Some industries naturally have low quick ratios
- Seasonal businesses show variation
- Doesn't consider credit lines
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