The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. The quick ratio is considered a more conservative measure than the current ratio, which includes all current assets as coverage for current liabilities.
The quick ratio measures the dollar amount of liquid assets available against the dollar amount of current liabilities of a company. Liquid assets are those current assets that can be quickly converted into cash with minimal impact on the price received in the open market, while current liabilities are a company's debts or obligations that are due to be paid to creditors within one year.
A result of 1 is considered to be the normal quick ratio. It indicates that the company is fully equipped with exactly enough assets to be instantly liquidated to pay off its current liabilities. A company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly get rid of its current liabilities. For instance, a quick ratio of 1.5 indicates that a company has $1.50 of liquid assets available to cover each $1 of its current liabilities.
Quick Ratio Formula
There's a few different ways to calculate the quick ratio. The most common approach is to add the most liquid assets and divide the total by current liabilities:
Quick Ratio = “Quick Assets” / Current Liabilities
Quick assets are defined as the most liquid current assets that can easily be exchanged for cash. For most companies, quick assets are limited to just a few types of assets:
Quick Assets = Cash + CE + MS + NAR
where:
CE = Cash equivalents
MS = Marketable securities
NAR = Net accounts receivable
Source: Investopedia, Quick Ratio Formula With Examples, Pros and Cons, accessed 25 April 2024, <https://www.investopedia.com/terms/q/quickratio.asp>
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