Quick Ratio
The quick ratio, sometimes called the acid test, divides current assets excluding inventory by current liabilities. Its premise is severe but realistic: in a cash squeeze, inventory sells slowly and at a discount, so only cash, short-term investments, and receivables count as ammunition against the bills due within the year.
The math
A company shows $400M of current assets, a comfortable 1.6 current ratio against $250M of current liabilities. Strip out $140M of inventory and quick assets fall to $260M: a quick ratio of 1.04, barely covered.
| Current ratio | Quick ratio | |
|---|---|---|
| Assets counted | $400M | $260M |
| Current liabilities | $250M | $250M |
| Result | 1.6 | 1.04 |
Stress it further: if a downturn forces that inventory to move at 50 cents on the dollar, the apparent $150M cushion shrinks to $80M. A supplier who senses trouble and tightens payment terms from 60 days to 15 can consume that buffer inside a quarter, converting a solvent-looking balance sheet into a scramble for emergency financing.
The trap
Applying one threshold everywhere. A fast-turning retailer that converts inventory to cash in three weeks operates safely below 1.0, while a maker of specialized equipment with a nine-month sales cycle needs considerably more.
Judged without context, the number punishes sound businesses and pardons fragile ones, which defeats the purpose of computing it.
The move
Read the quick ratio next to the current ratio: a wide gap between the two flags dependence on inventory, which makes inventory turnover the next number worth checking. Watch receivables quality as well, since doubtful customers inflate quick assets exactly when they matter most.
Trend beats level here; a quick ratio declining across quarters while payables stretch is the classic profile of a company quietly running out of room.