quick ratio
/ kwik RAY-shee-oh /
Imagine an emergency where you must pay a bill today using only what you can turn into cash by tonight. Your house and car are valuable, but you cannot sell them by dinner — so they do not count. The quick ratio asks this harsh question of a company: if every short-term bill came due right now, could it pay using only its most liquid assets, the ones convertible to cash almost immediately?
The quick ratio, also called the acid-test ratio, equals the most liquid current assets divided by current liabilities. The 'quick' assets are cash, cash equivalents, short-term marketable securities, and accounts receivable — deliberately excluding inventory and prepaid expenses, which take time (or may fail) to turn into cash. If a firm has 50,000 cash, 70,000 receivables, and 80,000 inventory against 100,000 of current liabilities, its quick ratio is (50,000 + 70,000) / 100,000 = 1.2, even though its broader current ratio counting inventory would be 2.0.
The quick ratio matters because it is a tougher, more conservative liquidity test than the current ratio, prized by lenders worried about a cash crunch. It is especially revealing for businesses holding slow-moving or hard-to-sell inventory, where the current ratio can look reassuring while cash is actually tight. The caveat: receivables are counted as 'quick', yet some customers pay late or never — so even the quick ratio can flatter a company whose receivables are stale or uncollectible.
A furniture store shows a current ratio of 2.5, which looks safe. But most of its current assets are slow-selling sofas. Stripping out inventory, the quick ratio is only 0.7 — meaning it could not cover short-term bills without selling stock, a red flag the current ratio hid.
Removing inventory turns a comfortable-looking firm into a tight one.
The quick ratio still counts receivables as 'quick', so it can flatter a firm whose customers pay slowly or whose receivables are uncollectible.