What is the quick ratio?

Definition of quick ratio

The quick ratio is a means of measuring the ability of a company to use its cash or current assets to pay off its current liabilities. It is also often referred to as the ‘acid test’ ratio.

For the purposes of the quick ratio, current assets include cash, easily realisable investments and debtors. Current liabilities include all creditors due to be paid within one year, bank overdrafts and short-term payments (including the repayment of short-term loans).

Unlike when calculating the current ratio, stock - such as goods the company has not yet sold - is excluded from the quick ratio. This helps measure if the company can pay its liabilities in the event that it cannot sell its stock.

Quick ratio formula

A simple formula for calculating the quick ratio is:

Quick ratio = (current assets - stock) / current liabilities

A quick ratio result of less than 1:1 is generally considered unhealthy, as the company could struggle to pay its debts if it became unable to sell its stock. A result of 1:1 or higher means that the business can meet its short-term liabilities even in the event that it cannot sell its stock.