| quick ratio A relatively severe test of a company's liquidity and its ability to meet short-term obligations. The quick ratio is calculated by dividing all current assets with the exception of inventory by current liabilities. Inventory is excluded on the basis that it is the least liquid current asset. A relatively high quick ratio indicates conservative management and the ability to satisfy short-term obligations. Also called acid-test ratio. Compare cash ratio. See also current ratio, net quick assets. |
What Does Quick Ratio Mean?
Also known as the “acid-test ratio” or the quick assets ratio, this is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. The quick ratio is calculated as shown here:
Investopedia explains Quick Ratio
The quick ratio is more conservative than the current ratio, a better-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. If short-term obligations have to be paid off immediately, there are circumstances in which the current ratio could overestimate a company's short-term financial strength.
Related Terms:
• Acid-Test Ratio
• Current Assets
• Current Liabilities
• Current Ratio
• Liquidity
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