The quick ratio (also called the acid-test ratio) measures a company's ability to meet its short-term liabilities using only its most liquid assets: cash, marketable securities, and accounts receivable. It excludes inventory and prepaid expenses because these take longer to convert to cash.
What is a good quick ratio?
A quick ratio of 1.0 or above is generally considered adequate — it means you have at least $1 of liquid assets for every $1 of current liabilities. A ratio of 1.5 or above is strong. Below 0.7 suggests the business may struggle to meet obligations without selling inventory or securing additional financing.
Why is the quick ratio more conservative than the current ratio?
The current ratio includes inventory and prepaid expenses, which may take months to convert to cash. The quick ratio removes these, leaving only assets that can be liquidated almost immediately. For manufacturing, retail, and distribution businesses with significant inventory, the quick ratio is a more meaningful liquidity test.
Can a business have a good current ratio but a poor quick ratio?
Yes, and this is common in inventory-heavy businesses. A retailer might have a current ratio of 2.5x (looks healthy) but a quick ratio of 0.6x (poor liquidity) if most of its current assets are tied up in inventory. If sales slow, the inventory cannot be quickly converted to cash to cover obligations.