# Quick ratio or Acid-test ratio

Checked for updates, April 2022. Accountingverse.com

## What is Quick Ratio?

The quick ratio, also known as acid-test ratio, is a financial ratio that measures liquidity using the more liquid types of current assets. Its computation is similar to that of the current ratio, only that inventories and prepayments are excluded.

## Quick Ratio Formula

The quick ratio (or acid-test ratio) is a more conservative measure of liquidity than the current ratio. The formula for quick ratio is:

Quick ratio = Quick assets ÷ Current liabilities

Quick assets refer to the more liquid types of current assets which include: cash and cash equivalents, marketable securities, and short-term receivables. Inventories and prepayments are not included. Hence, the quick ratio can also be computed as:

Quick ratio = (Cash and cash equivalents + Marketable securities + Short-term receivables) ÷ Current liabilities, or

Quick ratio = (Current assets – Inventories – Prepayments) ÷ Current liabilities

## Example

The following figures have been taken from the balance sheet of GHI Company.

 Current assets: Cash and cash equivalents \$    76,000 Marketable securities 110,000 Trade and other receivables 230,000 Inventories 167,000 Prepayments 42,000 Total current assets \$    625,000 Non-current assets: Long-term investments \$    450,000 Fixed assets 900,000 Total current assets \$ 1,350,000 TOTAL ASSETS \$ 1,975,000
 Current liabilities \$    350,000 Non-current liabilities 900,000 Stockholders' equity 725,000 TOTAL LIABILITIES & EQUITY \$ 1,975,000
 Computation of quick ratio: Quick ratio = Quick assets ÷ Current liabilities = (\$76,000 + \$110,000 + \$230,000) ÷ \$350,000 Quick ratio = 1.19

## Interpreting the Quick Ratio

A quick ratio that is greater than 1 means that the company has enough quick assets to pay for its current liabilities. Quick assets (cash and cash equivalents, marketable securities, and short-term receivables) are current assets that can be converted very easily into cash. Hence, companies with good quick ratios are favored by creditors.

In the example above, the quick ratio of 1.19 shows that GHI Company has enough current assets to cover its current liabilities. For every \$1 of current liability, the company has \$1.19 of quick assets to pay for it.

The ideal ratio depends greatly upon the industry that the company is in. A company operating in an industry with a short operating cycle generally does not need a high quick ratio. Financial ratios should be compared with industry standards to determine whether such ratios are normal or deviate materially from what is expected.

Key Takeaways

Quick ratio (acid-test ratio)

• measure of a company's liquidity or ability to pay short-term obligations, calculated as: quick assets divided by current liabilities
• quick assets include cash and cash equivalents, short-term investments, and short-term receivables. It excludes inventories and prepayments
• a quick ratio greater than 1 means that the company has sufficient quick assets to cover maturing obligations
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