The quick ratio, also referred to as the acid-test ratio, assesses a company’s capacity to settle its short-term debts by utilizing its most readily available assets, such as cash and accounts receivable. It is determined by dividing the total quick assets by the total current liabilities. This ratio holds significance as it indicates a company’s ability to fulfil its financial obligations without resorting to selling its long-term assets.
The quick ratio, also referred to as the quick-asset ratio or acid-test ratio, is a financial metric used to assess a company’s ability to settle its current debts using its most readily available assets. These assets typically include cash, marketable securities, and accounts receivable. The formula for calculating the quick ratio is as follows: Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities
For example, let’s consider Company A, which has $100,000 in current assets, $20,000 in inventory, and $5,000 in prepaid expenses. The company’s current liabilities amount to $50,000. To determine the quick ratio, we subtract the inventory and prepaid expenses from the current assets: Quick Ratio = ($100,000 – $20,000 – $5,000) / $50,000 = 1.5
This indicates that Company A possesses $1.50 in liquid assets for every $1 of current liabilities. Generally, a quick ratio of 1 or higher is considered favorable as it suggests that the company can fulfil its short-term obligations without needing to sell off its inventory or other assets.
The quick ratio, also known as the acid-test ratio, is a measure of a company’s ability to meet its short-term obligations with its most liquid assets.
The quick ratio is calculated by adding together a company’s cash, marketable securities, and accounts receivable, and then dividing that sum by its current liabilities.
A high quick ratio indicates that a company has a strong ability to meet its short-term obligations without having to sell off its inventory or other less liquid assets.
A low quick ratio may indicate that a company could have difficulty meeting its short-term obligations, and may need to rely on selling off inventory or obtaining additional financing.
The quick ratio only includes the most liquid assets, while the current ratio includes all current assets. This means the quick ratio provides a more conservative measure of a company’s ability to meet its short-term obligations.
A quick ratio of 1 or higher is generally considered to be a good indication that a company can meet its short-term obligations.
Yes, if a company has more current liabilities than it has quick assets, the quick ratio can be negative.
The quick ratio should be calculated regularly, such as at the end of each financial reporting period, to monitor a company’s liquidity.
The quick ratio does not take into account the timing of accounts receivable collections or the quality of inventory, and may not provide a complete picture of a company’s liquidity.
A company can improve its quick ratio by increasing its cash reserves, reducing its accounts receivable collection period, or decreasing its current liabilities.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/quick-ratio/
- Modern Language Association (MLA):Quick Ratio. dlssolicitors.com. DLS Solicitors. May 09 2024 https://dlssolicitors.com/define/quick-ratio/.
- Chicago Manual of Style (CMS):Quick Ratio. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/quick-ratio/ (accessed: May 09 2024).
- American Psychological Association (APA):Quick Ratio. dlssolicitors.com. Retrieved May 09 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/quick-ratio/
Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.
All author posts