# Quick Ratio

## Definition

Also known as the acid test, the quick ratio is a measure of liquidity, which is the ability of a company to pay its short term debt obligations using a subset of current assets known as quick assets.  The calculation of the quick ratio requires information found on a company's balance sheet.

### Calculation

Quick Ratio = Quick Assets / Current Liabilities

Where

• Quick Assets = Current Assets - Inventories - Prepaid Expenses

### Explanation

Since prepaid expenses and inventories are more difficult to convert into cash than other current assets (cash, marketable securities, accounts receivable), a ratio known as the Quick Ratio, is sometimes used by analysts and investors to supplement the current ratio.  A quick ratio of 1.0 or better is considered satisfactory.  When the ratio is greater than 1.0, a company can easily satisfy current liabilities using their quick assets.

When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.

### Example

Company A's balance sheet indicates current assets of \$12,240,000, inventories of \$3,416,000 and prepaid expenses of \$1,277,000.  Total current liabilities were found to be \$5,441,000.

Using the above formula, the quick ratio would be:

= (\$12,240,000 - \$3,416,000 - \$1,277,000) / \$5,441,000
= \$7,502,000 / \$5,441,000, or 1.38

In this example, Company A's quick ratio is well above 1.0, which is considered satisfactory.