What is quick ratio?

The quick ratio, also called the acid-test ratio, is a stricter liquidity measure than the current ratio. It counts only assets that can be converted to cash quickly and with little loss of value: cash, marketable securities and accounts receivable. Inventory and prepaid expenses are excluded because they may take time to sell or cannot be converted to cash at all.

Credit analysts use the quick ratio to test whether a borrower could meet its short-term obligations without relying on inventory sales. It is especially informative for businesses with large or slow-turning inventories, such as manufacturers and distributors. A ratio near or above 1.0x generally indicates that liquid assets cover current liabilities, though acceptable levels differ widely by industry.

The quality of receivables drives the ratio. Aged, disputed or concentrated receivables, or amounts due from affiliates and owners, should be scrutinized or excluded. A strong quick ratio at a single fiscal year end may reflect timing rather than sustained liquidity. Analysts should read it alongside the receivables aging, the current ratio and the trend in cash balances.