Quick Ratio or Acid-test Ratio measures a company's ability to pay off all short-term liabilities immediately with its most liquid assets.
$$Quick\; Ratio \mmlToken{mo}[linebreak="auto"]{=} \frac{Cash+Cash Equivalents+Accounts\; Receivable}{Current\; Liabilities}$$
To meet all obligations simultaneously, a company's quick ratio should be 1 or higher. It's important to note that the ratio includes accounts receivable. For example, if a company has a significant amount of long-term accounts receivable and short-term liabilities come due, the quick ratio may not indicate a problem, even though the company may run out of cash. Conversely, if customers pay quickly but suppliers have longer payment terms, a low ratio may not necessarily indicate liquidity problems.
Quick Ratio FAQ
What is the quick ratio?
It measures whether liquid assets can cover current liabilities.
How do you calculate it?
Divide cash, cash equivalents, and receivables by current liabilities.
