The quick ratio, also known as the acid test ratio, measures a business’s capability to pay off its current, short-term liabilities with its most liquid assets, including cash, cash equivalents, and accounts receivable.
Therefore, the quick ratio formula is as follows:
Quick Ratio = (Cash + Cash Equivalents + Receivables) / Current Liabilities
A quick ratio of 1 means that a company has exactly the same amount of liquid assets as current liabilities. A ratio of less than 1 means that it does not have enough liquid assets available to immediately cover its short-term liabilities, and a ratio of more than 1 means that it has more than enough cash and near-cash assets to cover its debts that are due within a year.
The quick ratio is often compared to the current ratio. The primary difference between these two liquidity metrics is that the quick ratio only evaluates a company’s ability to pay off its short-term debts with cash and near-cash assets, while the current ratio also includes less liquid current assets, such as inventory. Essentially, the quick ratio looks at a company’s ability to pay its short-term liabilities immediately, making it a more conservative metric; the current ratio assumes a company has more time to liquidate.