Quick Ratio (Acid-Test Ratio)
The quick ratio, also known as the acid-test ratio or quick asset ratio, is another widely used measure of a company’s ability to pay its short-term obligations. This ratio is similar to the current ratio, but it excludes inventories from current assets and focuses instead on the company’s most liquid assets. The quick ratio is somewhat more conservative than the current ratio, because it analyzes what would occur if a company could not convert its inventory into cash and it needed “quick” money.
The quick ratio is calculated as follows:
A company with a high quick ratio should have a correspondingly high ability to pay its bills. As with the current ratio, a quick ratio of less than 1.0 can spell trouble.
Example Question 1
Let’s look again at Astral Planing. Recall that Astral has current assets of $1.4 million and current liabilities of $700,000. Assume Astral has inventories of $300,000. What is Astral’s quick ratio?
Answer: 1.6. Since the quick ratio = (current assets – invent