Quick Ratio: Formula, Examples, and How to Read It
Last updated 06/11/2026 by
Ante Mazalin
Edited by
Andrew Latham
Summary:
The quick ratio is a liquidity measure that shows whether a company can pay its short-term debts using only its most liquid assets.
Also called the acid-test ratio, it strips out inventory to give a stricter view of financial health than the current ratio.
- The formula: Liquid assets divided by current liabilities.
- Excludes inventory: It leaves out stock that may be slow to convert to cash.
- A ratio of 1 or more: Signals the company can cover its short-term obligations.
- Acid test: Another name for the same ratio, reflecting its strict standard.
A company can look healthy on paper and still struggle to pay its bills if its assets are tied up in unsold inventory. The quick ratio cuts through that by measuring only the cash a business could raise fast.
How to calculate the quick ratio
The quick ratio divides a company’s most liquid assets by its current liabilities. It answers one question: could the business pay everything due within a year using assets it can quickly turn into cash?
The formula is: Quick ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities.
You can also calculate it as current assets minus inventory and prepaid expenses, divided by current liabilities. Both approaches deliberately leave out current assets that are hard to convert quickly.
Quick ratio vs. current ratio
The quick ratio and the current ratio both measure short-term liquidity, but the quick ratio is stricter. The difference is inventory.
| Measure | Includes inventory? | What it shows |
|---|---|---|
| Quick ratio | No | Ability to pay debts without selling inventory |
| Current ratio | Yes | Ability to pay debts using all current assets |
For a business with a lot of slow-moving stock, the quick ratio gives a more honest picture, because inventory may not sell in time to cover urgent bills.
Good to know: A high quick ratio is not always ideal. A very large number can mean a company is holding too much idle cash instead of investing it to grow.
How to read the quick ratio
A quick ratio of 1.0 means a company has exactly enough liquid assets to cover its current liabilities. Higher is generally safer, while lower signals potential trouble paying short-term debts.
- Above 1.0: The company can cover current liabilities without selling inventory.
- Exactly 1.0: Liquid assets just match short-term obligations.
- Below 1.0: The company may struggle to pay near-term debts and could rely on inventory sales or new financing.
What counts as healthy varies by industry, so the ratio is most useful when compared against direct competitors.
Pro Tip
Compare a company’s quick ratio against its own history and its industry peers, not a universal benchmark. A grocery chain runs on thin liquidity by design, while a software firm often carries far more cash, so the same number means very different things.
Why the quick ratio matters
The quick ratio matters most to lenders, suppliers, and investors who want to know if a business can survive a short-term cash crunch. It is a fast gauge of resilience.
How to calculate a quick ratio step by step
- Find liquid assets: Add cash, marketable securities, and accounts receivable from the balance sheet.
- Exclude inventory: Leave out inventory and prepaid expenses, since they convert slowly.
- Find current liabilities: Total all obligations due within one year.
- Divide: Divide liquid assets by current liabilities to get the ratio.
- Compare: Measure the result against peers and the company’s own trend.
According to the U.S. Securities and Exchange Commission, ratios like this one help investors judge a company’s ability to meet its obligations from its financial statements.
Related reading on financial analysis
- Current ratio is the broader liquidity measure that includes inventory.
- Balance sheet is where you find the assets and liabilities used in the formula.
- Net working capital shows the dollar gap between current assets and liabilities.
- Current assets explains the short-term resources behind the ratio.
Frequently asked questions
What is a good quick ratio?
A quick ratio of 1.0 or higher is generally considered healthy, meaning a company can cover its short-term liabilities without selling inventory. The ideal level varies by industry, so compare against peers.
Why does the quick ratio exclude inventory?
Inventory can take time to sell and may not convert to cash quickly enough to pay urgent bills. Excluding it gives a stricter, more conservative view of liquidity than the current ratio.
What does a quick ratio below 1 mean?
It means a company’s most liquid assets do not fully cover its current liabilities. The business may need to sell inventory, collect receivables faster, or raise financing to meet its obligations.
Is the quick ratio the same as the acid-test ratio?
Yes. The acid-test ratio is simply another name for the quick ratio, reflecting how strictly it tests a company’s ability to pay debts.
Key takeaways
- The quick ratio measures whether a company can pay short-term debts with its most liquid assets.
- It equals liquid assets divided by current liabilities, excluding inventory.
- A ratio of 1.0 or more generally signals adequate short-term liquidity.
- It is stricter than the current ratio, which includes inventory.
- Healthy levels vary by industry, so compare against peers and trends.
Reading liquidity ratios is a core skill for evaluating any company before you invest. You can compare investment platforms that give you the research tools and financial statements to run these numbers yourself.
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