Another important measure of a company’s ability to stay afloat is the quick ratio, which essentially measures the same thing as the current ratio. However, there is one key difference between the current ratio and the quick ratio: the quick ratio does not include inventory among the assets counted on the top line of the equation. Thus, the formula is:
As opposed to the current ratio, the quick ratio is meant to give a sense of a company’s ability to stay afloat without having to liquidate its inventory. Selling inventory can be difficult to accomplish in the short term. Naturally, a company with a ton of inventory but not a ton of cash would look less attractive using the quick ratio compared to the current ratio.
Here’s an example of how the ABC Company’s quick ratio of 0.75 was calculated based on the following amounts found on its balance sheet:
