UK Accounting Glossary
Quick Ratio provides a measure of a company’s ability to meet its short-term obligations using its most liquid assets. Quick assets include those current assets that are convertible to cash at close to their book values. The Quick Ratio is also known as the Acid-Test Ratio or Quick Assets Ratio.
The quick ratio is a measure of the ability of a company to pay its short-term debts. The quick ratio includes accounts receivable because they are usually converted to cash in 90 days; but the quick ratio does not include inventories, which may take as long as a year to become cash. Indeed, the quick ratio, unlike the current ratio, only includes assets that can be quickly converted. As a result, the quick ratio is a particularly conservative measure of a company’s bill-paying ability. As with all ratios, how high a quick ratio should vary among industries, but usually, a quick ratio of 1:1 or higher is considered good. In other words, a quick ratio of 100% tells creditors that the company could pay its immediate bills even if no inventory is converted to cash. Note that the quick ratio is also known as the acid test ratio.
The Quick Ratio formula divides liquid assets by current liabilities. The liquid assets are determined by deducting inventories from total current assets. Inventories can be difficult to convert to cash.
Quick Ratio is viewed as a sign of a company’s financial strength or weakness. The higher the Quick Ratio, the better the position of the company. It provides information regarding a company’s short term liquidity, informing creditors how much of the company’s short term debt can be met by selling the company’s liquid assets on short notice.
The commonly acceptable Quick Ratio is 1 but may vary from industry to industry. A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities; a bad sign for investors and partners.
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This glossary post was last updated: 6th February 2020.