Quick ratio (acid-test).
In plain English
The quick ratio measures whether a company could cover the bills that fall due within a year without selling any inventory or leaning on prepaid items. It removes the current assets that are slowest and least certain to convert into cash. For an inventory-heavy retailer the gap between the current ratio and the quick ratio can be enormous. A quick ratio near or above 1 means obligations due this year are covered by assets that are already cash or close to it. Neither ratio says anything about profitability, and a company can look liquid on paper while losing money every month.
01Why it matters
If a business had to pay its short-term bills this quarter without a fire sale of stock, this is the number that says whether it could.
02The math, step by step
Say current assets are 900,000 dollars, of which 350,000 dollars is inventory, against 600,000 dollars of current liabilities. The current ratio is 1.5, but the quick ratio is 0.92 ((900,000 minus 350,000) divided by 600,000). The company depends on selling stock to cover its bills.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
They differ by exactly what sits in inventory and prepaid items. A company with a current ratio of 2.0 and a quick ratio of 0.6 is telling you most of its short-term cushion is merchandise on a shelf, which only helps if it sells.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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