Cash & working capital
Quick ratio
The quick ratio, also called the acid-test ratio, compares a business’s most liquid assets with what it owes within a year, leaving out inventory and prepaid expenses.
Quick ratio = (Cash + Marketable securities + Accounts receivable) ÷ Current liabilities
Worked example
| Cash | $100,000 |
| Accounts receivable | $150,000 |
| Inventory | $200,000 (excluded) |
| Current liabilities | $250,000 |
($100,000 + $150,000) ÷ $250,000 = 1.0, against a current ratio of 1.8
Why it matters
Inventory cannot always be sold fast enough to pay a bill. The quick ratio asks whether the business could meet its near-term obligations without selling any stock.
Common mistakes
Where it misleads
Leaving inventory or prepaid expenses in, which turns it back into the current ratio.
Counting receivables at face value when part of them is long overdue.
Applying the same target to a service business and a retailer, whose balance sheets look nothing alike.
Related terms
Keep reading
- Current ratioThe current ratio compares what a business can turn into cash within a year with what it owes within a year.
- Working capitalWorking capital is the money tied up in running the business day to day: current assets such as cash, receivables and inventory, minus the current liabilities due within a year.
- Accounts receivable aging (AR aging)An accounts receivable aging report groups unpaid customer invoices by how long they are past due, so you can see which money is at risk of never arriving.
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