Quick Ratio (Acid-Test)
Current assets minus inventory, divided by current liabilities. Stricter than current ratio because inventory often takes time and discounting to convert to cash.
When to use: Use when inventory is large or slow-moving — heavy retailers, manufacturers, real-estate developers. >1 means the firm can cover current liabilities without selling inventory; <1 signals dependence on inventory liquidation in a crunch.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| QR | Quick Ratio | (Current assets − inventory) / current liabilities | integer |
| CurrentAssets | Current Assets | Cash + receivables + inventory + other current assets | $ |
| Inventory | Inventory | Inventory on the balance sheet | $ |
| CurrentLiabilities | Current Liabilities | Accounts payable, short-term debt, and other liabilities due within one year | $ |
Real-Life Examples
Example 1: Inventory-Heavy Retailer
Current assets $500M (with $300M of that in inventory). Current liabilities $250M.
Given
Step-by-Step
Quick ratio of 0.80 — current ratio of 2.0 looks healthy, but stripping inventory shows the firm cannot cover near-term liabilities without selling stock. Common for retailers; concerning for slower-moving industries.
Frequently Asked Questions
Because inventory is the slowest-converting current asset. Selling it requires either time (full price) or discounts (immediate). Excluding it gives a more conservative liquidity read.
Above 1 is generally healthy. Tech and services firms often run quick ratios of 1.5–3 (low inventory). Retailers and manufacturers commonly run 0.5–1 (acceptable for them).