What Is the Quick Ratio?

The quick ratio, also known as the acid-test ratio, is a financial measurement used to determine a company’s short-term financial health. It measures a company’s ability to pay off its short-term liabilities with its most liquid assets.

Quick Ratio Formula

The formula for determining the quick ratio is:

Quick Ratio = (Cash + Short-Term Marketable Securities + Accounts Receivable) / Current Liabilities

Understanding the Quick Ratio

The quick ratio is often used as an indicator of a company’s financial health. Generally, the higher the quick ratio, the better off a company is in terms of its ability to meet its short-term liabilities. It is important to note, however, that a high quick ratio does not necessarily mean that a company is in good health, as this measure does not take into account long-term liabilities or assets.

At its core, the quick ratio is a measure of a company’s liquidity, or its ability to pay off short-term liabilities with its most liquid assets. Assets such as cash and marketable securities are considered to be the most liquid as they can be converted to cash relatively quickly. The quick ratio takes into account all of these liquid assets and divides them by current liabilities, which gives an indication of a company’s ability to cover its short-term liabilities.

The quick ratio is an important indicator of a company’s financial health and should be taken into consideration when evaluating a company’s performance and overall financial situation. It is a measure of a company’s liquidity, and as such can be used to inform decisions regarding investments or other business dealings.