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Quick Ratio

Understanding the Quick Ratio: A Key Measure of Financial Liquidity

The Quick Ratio, also known as the Acid-Test Ratio, is a financial metric used to evaluate a company's ability to meet its short-term obligations with its most liquid assets. Unlike the current ratio, the quick ratio excludes inventory from current assets, considering only cash, marketable securities, and accounts receivable. This provides a more stringent measure of liquidity.

Quick Ratio=(Cash and Cash Equivalents + Marketable Securities + Accounts Receivable)/Current Liabilities


Suppose Company XYZ has the following financial details:


  • Cash: $50,000

  • Marketable Securities: $30,000

  • Accounts Receivable: $40,000

  • Inventory: $20,000

  • Current Liabilities: $90,000


To calculate the Quick Ratio:


  1. Sum the liquid assets (excluding inventory): $50,000 (Cash) + $30,000 (Marketable Securities) + $40,000 (Accounts Receivable) = $120,000

  2. Divide by the current liabilities: $120,000/$90,000 = 1.33

A Quick Ratio of 1.33 indicates that Company XYZ has $1.33 in liquid assets for every $1 of its current liabilities. This suggests that the company is in a good position to cover its short-term debts without needing to sell inventory.

Liquidity Ratio

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