Glossary
Quick ratio
Cash, marketable securities and receivables divided by current liabilities: a strict test of short-term liquidity that leaves out inventory.
The quick ratio, also called the acid-test ratio, measures whether a company could pay its bills due within a year using only its most liquid assets. It counts cash, short-term marketable securities and accounts receivable, and deliberately leaves out inventory and prepaid expenses, which can be slow or hard to turn into cash. It is a tougher version of the Current Ratio.
How it works
How to read it
A quick ratio of 1.0 or above means liquid assets alone cover short-term obligations, which lenders and analysts generally like to see. Below 1.0 is not automatically a warning. What counts as healthy depends on the business:
- Retailers and grocers often run quick ratios well below 1 because inventory sells fast and customers pay immediately.
- Software firms with lots of cash and little inventory can show very high ratios.
- Industrial companies with slow-moving inventory deserve the closest look, because their current ratio can overstate liquidity.
Trends matter as much as levels. A falling quick ratio alongside rising receivables can mean customers are paying more slowly.
Limits to keep in mind
The ratio is a snapshot on the balance-sheet date and can be flattered by timing, such as drawing on a credit line just before quarter-end. It also treats all receivables as collectible; checking the allowance for doubtful accounts and days sales outstanding gives a fuller picture.