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The quick ratio, also known as the acid-test ratio or liquid ratio, is a liquidity ratio that a company uses to measure the ability use near cash or quick assets in order to meet their short-term obligations without liquidating its inventory.

Calculation of the quick ratio

Current liabilities are considered to be short-term obligations. These short-term obligations are considered due within a one year's time. Quick assets are the assets from the current portion of the balance sheet that presumably can be quickly turned into cash close to the actual value book value. Some of these quick assets include cash, cash equivalents, accounts receivable, and some marketable securities. Inventory, although considered a current asset, is not considered a quick asset because there is a lot of liability and cost associated with keeping inventory. There is holding costs with inventory, which is money spent to keep and maintain a stock of goods in storage. The quick ratio measures a company's capacity to maintain operations as usual with quick assets or near cash savings in bad years. This ratio is a liquidity ratio and only focuses on a liquidation outlook and does not focus on the other parts of the current assets and liabilities. Quick ratio compares a company's cash and short-term investments to the financial obligations the company is expected to pay within a one year's time. Below is the equation for the quick ratio.

Quick ratio:
Current assets - Inventory
Current liabilities

$220,214 - $24,507 = 5.49 or 5.49:1
In general, a quick ratio of 1:1 or greater is desired.



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Categories: Financing