The quick ratio is a liquidity measure that shows whether your business can pay its short-term obligations using only its most liquid assets. Unlike the current ratio it leaves inventory out, because stock often cannot be turned into cash quickly. The formula is: current assets minus inventory, divided by current liabilities. In this article you can read how to calculate the quick ratio, what counts as a healthy value and where the figure can mislead you.
Table of contents
What is the quick ratio?
The quick ratio, also called the acid test ratio, came out of the early twentieth century need to measure liquidity in a way that could be relied on. It is a stricter version of the current ratio: where that one counts all current assets, the quick ratio drops inventory. As a result you get a sharper picture of what you could actually deploy in the short term to settle your debts. Investors and lenders use the figure to judge financial health, which is why it turns up in loan conditions and due diligence.
How do you calculate the quick ratio?
You calculate the quick ratio as current assets minus inventory, divided by current liabilities. Current assets without inventory consist mainly of cash, bank balances and trade receivables. An example: with 80,000 in cash and receivables against 50,000 in current liabilities, the quick ratio is 1.6. A quick ratio of 1 or higher is generally read as healthy, because it means you can cover your short-term obligations without having to sell stock first.
| Include | Cash and bank balances, trade receivables, short-term investments that can be sold quickly |
| Leave out | Inventory, work in progress, prepaid expenses |
| Divide by | Current liabilities: trade payables, tax due, short-term loans, the current portion of long-term debt |
What do you use it for?
Calculate the quick ratio regularly so you track your liquidity and see cash flow problems while there is still time to act. Compare it with earlier periods to spot a trend, and with sector averages or competitors to place yourself. A healthy quick ratio also builds confidence with financiers, which can translate into better terms on a loan or an investment round.
What to watch out for
The quick ratio tells you part of the story. A high ratio can mislead if you carry a heavy debt load at the same time. Look at the composition of your current assets as well, because receivables you will never collect flatter the outcome. Take seasonal swings in turnover into account, and remember that the ratio is a snapshot on a balance sheet date rather than a description of your month. So read it alongside other measures and in context.
Sector matters more than any rule of thumb. A retailer holding most of its value in stock will show a low quick ratio by design, while a services business with no inventory can sit well above 1 without that saying much. Compare like with like before you draw a conclusion.
The quick ratio and TriFact365
You calculate the quick ratio in your accounting package or an analysis tool, on the basis of the figures in your administration. TriFact365 does not compute the ratio, but it does keep that administration current: the software recognises your invoices and prepares them as a booking proposal for your accounting package. As a result your payables are booked in the period they belong to rather than in a batch weeks later, which is exactly the number in the denominator. See how processing incoming invoices works.
Frequently asked questions
Take current assets minus inventory and divide by current liabilities. The assets without inventory are mainly cash, bank balances and trade receivables.
A quick ratio of 1 or higher is usually read as healthy, because you can then cover short-term obligations without selling stock. What counts as healthy depends on your sector.
The current ratio counts all current assets, inventory included. The quick ratio leaves inventory out and therefore gives a stricter, more cautious view of short-term liquidity.
Because it is meant as a hard test: strip out the assets you cannot convert quickly and see what is left to pay the bills with. The two names refer to the same calculation.
It can be a signal worth checking. A very high ratio may mean cash is sitting idle instead of being invested, so read it together with your return figures rather than treating higher as always better.
TriFact365 does not calculate the ratio. It keeps your administration current by recognising your invoices and preparing them as a booking proposal, so the figures the quick ratio rests on are up to date.
In closing
The quick ratio gives a sharp, cautious view of your short-term liquidity. Calculate it regularly, read it in context and use it alongside other measures. A reliable outcome starts with a current administration, which is what automated invoice processing delivers.
