Quick Ratio

Full form: Acid-Test Ratio

Investments

The quick ratio measures a company's ability to meet short-term obligations using its most liquid assets (excluding inventory). A quick ratio above 1 means the company can cover all current liabilities without selling inventory. Used by investors to assess financial health of companies.

In detail

Quick ratio formula: (Cash + Marketable Securities + Accounts Receivable) / Current LiabilitiesnAlso written as: (Current Assets - Inventory - Prepaid Expenses) / Current LiabilitiesnnInterpretation:nAbove 1.5: very comfortable liquidityn1.0-1.5: adequaten0.5-1.0: may face liquidity pressurenBelow 0.5: potential liquidity crisisnnLimitations:nDoes not show speed of receivable collectionnSector-specific: FMCG companies with fast inventory turnover can operate with lower ratiosnCompare against sector peers, not absolute numbers

Formula

Quick Ratio = (Cash + Short-term Investments + Receivables) / Current LiabilitiesnIdeally > 1.0 for most non-FMCG sectors

Real-life example

🇮🇳 India example

Investor Rohan evaluates two auto component companies:nCompany A: Quick ratio 1.8 -- strong, can easily meet short-term duesnCompany B: Quick ratio 0.6 -- may need to sell inventory or take short-term loans to meet obligationsnDuring COVID supply disruption: Company B struggled to pay suppliers, faced penalties. Company A sailed through. Rohan's quick ratio check identified the risk before the crisis.

Frequently asked questions

Current ratio vs quick ratio -- which is more important? ▼

Quick ratio is more conservative and more meaningful. Current ratio includes inventory which can be illiquid. Quick ratio shows true liquid asset cushion. For manufacturing companies: use both. For FMCG companies: current ratio is sufficient (inventory is liquid). For service companies: quick ratio is most relevant (minimal inventory). Both are available in company's balance sheet filings on BSE/NSE.