Quick Ratio Metric

Overview

Quick Ratio measures the ability of your organization to meet any short-term financial obligations with assets that can be quickly converted into cash. This ratio offers a more conservative assessment of your fiscal health than the current ratio because it excludes inventories from your assets, removing assets that may not be easily converted to cash. Like your current ratio, a quick ratio greater than 1 indicates that your business is able to meet its short-term financial obligations.

Formula

Quick ratio = (Cash + Short-term marketable investments + Receivables) / (Current liabilities)

Example of Quick Ratio

A company has the following:

Current assets = $6,877,756
Inventory = $1,500,000
Current liabilities = $438,332

The quick ratio is therefore calculated as follows: ($6,877,756-$1,500,000) / $438,332 = 12.27

This company is able to cover its current liabilities 12 times with their assets that are quickly converted to cash.

Key terms

• Assets: An economic resource that has cash value.
• Liability: A financial obligation that stems from previous transactions, such as a purchase order.

Success indicators

• A quick ratio between 1.5 and 3.
• A current ratio that is greater than 1 and that is stable over the long term.