# Quick ratio

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{{Short description|A company's liquid assets divided by its current liabilities}}
In [finance](/source/finance), the '''quick ratio''', also known as the '''acid-test ratio''', is a [liquidity ratio](/source/Accounting_liquidity) that measures the ability of a company to use [near-cash assets](/source/Cash_and_cash_equivalents) (or 'quick' assets) to extinguish or retire [current liabilities](/source/current_liability) immediately. It is the [ratio](/source/Financial_ratio) between quick assets and current liabilities. 

A normal liquid ratio is considered to be 1:1. A company with a quick ratio of less than 1 cannot currently fully pay back its current liabilities.  

The quick ratio is similar to the [current ratio](/source/current_ratio), but it provides a more conservative assessment of the liquidity position of a firm as it excludes [inventory](/source/inventory),<ref>Drake, P. P., ''Financial ratio analysis'', p. 4, published on 15 December 2012</ref> which it does not consider sufficiently liquid. 

==Formula==
:<math>\text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}}</math>

Where quick assets can be defined as follows: 

:<math>\text{Quick Assets} = \text{Cash and Cash Equivalents} + \text{Marketable Securities} + \text{Accounts Receivable} = \text{Current Assets} - \text{Inventory} - \text{Prepaid Expenses}</math>

Although the quick ratio is a test for the financial viability of a business, it does not give a complete picture of the business's health. For example, if a business has large amounts in [accounts receivable](/source/accounts_receivable) due for payment after a long period, while also having larger [accounts payable](/source/accounts_payable) due for immediate payment, the quick ratio may look healthy when the business is actually about to run out of cash. In contrast, if a business has fast payment from customers, but long terms from suppliers, it may have a low quick ratio and yet be very healthy. 

Generally, the acid test ratio should be 1:1 or higher for a healthy company. However, this varies widely by industry.<ref>{{cite book 
|last=Tracy 
|first=John A.
|title=How to Read a Financial Report: Wringing Vital Signs Out of the Numbers
|year=2004 
|publisher=John Wiley and Sons
|isbn=0-471-64693-8
|page=173 }}</ref> In general, the higher the ratio, the greater the company's [accounting liquidity](/source/accounting_liquidity).<ref>{{cite book | last = Gallagher | first = Timothy | title = Financial Management | publisher = Prentice Hall | location = Englewood Cliffs | year = 2003 | isbn = 0-13-067488-5 | pages = [https://archive.org/details/financialmanagem00timo/page/94 94–95] | url-access = registration | url = https://archive.org/details/financialmanagem00timo/page/94 }}</ref>

==See also==
*[Current ratio](/source/Current_ratio)
*[Financial Accounting](/source/Financial_Accounting)

== References ==
{{reflist}}

Category:Financial ratios

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