Quick ratio formula
Quick Ratio = (Cash + Short-term Investments + Trade Debtors) / Current Liabilities. Or more simply: (Current Assets - Stock) / Current Liabilities.
- Excludes inventory and prepaid expenses from the numerator
- Focuses on assets that can be converted to cash quickly (within 90 days)
- A ratio of 1.0 means liquid assets exactly cover current liabilities
Quick ratio vs current ratio
The current ratio includes all current assets, including stock. The quick ratio is more conservative because it only includes assets that can be turned into cash relatively quickly. For businesses carrying significant stock values, the quick ratio may paint a materially different picture from the current ratio.
What a low quick ratio means
A quick ratio below 1.0 means the business cannot immediately cover its current liabilities from its liquid assets alone. It would need to sell stock or access additional financing. This is not necessarily a crisis if the business has strong cash flow, but it is a warning sign that warrants attention.
Frequently Asked Questions
What is the ideal quick ratio?
A quick ratio of 1.0 or above is generally considered acceptable. Ratios significantly above 1.5 may suggest excess cash that could be better deployed in the business. Ratios below 0.7 may concern lenders.