What is Quick Ratio & How to Calculate

What Is Quick Ratio

Quick ratio, also called the acid test, measures whether a company can cover near term liabilities using only its most liquid current assets. Those “quick assets” are cash, cash equivalents, marketable securities, and net receivables. Inventory and most prepaids are excluded because they are slower to convert into cash.

What Counts As Cash Equivalents

Under IFRS and US GAAP, cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of value changes. Think Treasury bills and institutional money market funds with very short maturities.

Quick Ratio Formula

Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Net Accounts Receivable) ÷ Current Liabilities

• Cash: Physical cash and demand deposits you can use immediately (bank checking/current accounts). It’s the most liquid line in current assets.
• Cash equivalents: Short-term (typically ≤3 months), highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of value changes. Common examples: Treasury bills, institutional money-market funds, overnight deposits, and high-grade commercial paper. Equity investments are not cash equivalents unless redeemable at a fixed amount on demand.
• Marketable securities: Liquid financial instruments that trade on public markets and can be sold quickly for cash. For quick-ratio purposes, think short-term holdings recorded as current assets—e.g., T-bills/notes, investment-grade bonds near maturity, and listed equities held for near-term liquidity (not strategic/illiquid stakes). Many filers classify these as available-for-sale or trading and carry them at fair value.
• Net accounts receivable: Customer invoices expected to be collected, i.e., gross A/R minus the allowance for doubtful accounts (and returns/credits). Using net (not gross) keeps the quick ratio conservative and closer to realizable cash.
• Current liabilities: Obligations due within 12 months (or within the normal operating cycle if longer) and items held for trading. Typical lines: accounts payable, accrued expenses, short-term borrowings, current portion of long-term debt, taxes payable, and similar dues. (Note: bank overdrafts repayable on demand can be treated as a component of cash and cash equivalents if they’re an integral part of cash management.)

A common equivalent form is:
Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities.

How to Calculate Quick Ratio

• Identify quick assets: cash, cash equivalents (e.g., T-bills, money market funds), marketable securities, and net accounts receivable.
• Exclude non-quick items: inventory and most prepaid expenses.
• Find current liabilities: obligations due within 12 months (A/P, short-term debt, current portion of long-term debt, accrued expenses, taxes payable).
• Compute: Sum quick assets and divide by current liabilities.
• Interpret: ≈1.0 suggests liquid assets roughly cover near-term bills; always benchmark by industry and trend.

For example, Cash & cash equivalents: $250,000, Marketable securities: $100,000, Net accounts receivable: $150,000, Current liabilities: $400,000

Quick Ratio = (250,000 + 100,000 + 150,000) ÷ 400,000 = 1.25

The company has $1.25 in immediately liquid assets for every $1 of near-term liabilities, indicating solid short-term liquidity without relying on inventory.

What Is A Good Quick Ratio

A good quick ratio is typically around 1.0 or higher, meaning a company has at least $1 in liquid assets for every $1 of current liabilities. The ideal level depends on industry and business model: capital-light software firms often run higher, while retailers and utilities can operate safely below 1.0 if cash conversion is stable.

Quick Ratio vs Current Ratio

The quick ratio tests whether a company can meet near term obligations using only cash, cash equivalents, marketable securities, and net receivables, excluding inventory and most prepaids, so it is more conservative.

The current ratio includes all current assets, which can look stronger when inventory turns slowly. Use quick ratio for immediate liquidity stress checks and current ratio for a broader working capital view, and always judge both by industry benchmarks and trends over time.

Pros And Limitations

It excels at testing whether a company can cover near-term obligations without selling inventory, but it doesn’t capture cash-flow timing, credit lines, or seasonal swings. Use it alongside the current ratio, cash ratio, and trend analysis to avoid false comfort or false alarms.

Pros

• Fast, conservative read on near term liquidity.
• Useful for cross company comparisons within the same industry.

Limitations

• Point in time and sensitive to cutoff timing.
• Assumes receivables are collectible at book value.
• Ignores timing of cash inflows and committed credit lines.

Conclusion

The quick ratio is a fast, conservative check on near term liquidity. Use it with the current ratio, cash ratio, and trends to see whether a company can meet upcoming obligations without selling inventory. For context that actually helps your decisions, benchmark by industry and read the notes on receivables quality and cash-equivalent policies.

At Ultima Markets, our education team breaks these concepts into practical tools you can use. Explore our UM Academy guides, download a quick-ratio calculator, and keep learning how liquidity analysis fits into smarter risk management.