What is the Quick Ratio? Definition
The Quick Ratio method is a model for measuring the liquidity of a company. It is calculated by taking all assets which are quickly convertible into cash, and to divide the result by all current liabilities. It specifically excludes inventory. It is an indicator of the extent to which a company can pay current liabilities without having to rely on the sale of inventory.
Typically, a Quick Ratio of 1:1 or higher is good, and indicates a company
does not have to rely on the sale of inventory to pay the bills.
Calculation of the Quick Ratio. Formula
For the Quick Ratio formula, see the picture on the right.
This ratio is also known as the Acid-test Ratio.
A thing to remember when we use the Quick Ratio is that this model ignores timing of both cash received and cash paid out.
Take the example of a company with no bills due today, but lots of bills which are due tomorrow. This company may show a good Quick Ratio, but can not be considered as having a good liquidity.
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