quick ratio

Definition

A measure of a company's liquidity and ability to meet its obligations. Quick ratio, often referred to as acid-test ratio, is obtained by subtracting inventories from current assets and then dividing by current liabilities. Quick ratio is viewed as a sign of company's financial strength or weakness (higher number means stronger, lower number means weaker).

For example, if current assets equal $15,000,000, current inventory equals $6,000,000, and current liabilities equal $3,000,000, then quick ratio amounts to: ($15,000,000 - $6,000,000)/$3,000,000 = 3. Since we subtracted current inventory, it means that for every dollar of current liabilities there are three dollars of easily convertible assets. In general, a quick ratioof 1 or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry.

Use quick ratio in a sentence

The quick ratio is used to see how financially strong a company is. Companies want to aim to achieve a value above 1.

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cash asset ratio ratio