Quick Ratio

What Is the Quick Ratio?

The quick ratio measures a business's ability to meet its short-term obligations using only its most liquid assets — cash, accounts receivable, and short-term investments. It deliberately excludes inventory because inventory takes time to sell and convert to cash, and in a financial squeeze that time may not be available.

The quick ratio gives a more conservative and often more realistic picture of short-term liquidity than the current ratio. A business that looks fine on the current ratio but weak on the quick ratio is likely carrying significant inventory that it is counting on to meet near-term obligations.

The Formula

Quick Ratio = (Cash + Accounts Receivable + Short-Term Investments) / Current Liabilities

This is equivalent to:

Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

Definitions

Quick assets are assets that can be converted to cash within a very short time frame, typically 90 days or less. Cash, bank balances, and accounts receivable qualify. Inventory and prepaid expenses do not because they require additional steps before becoming cash.

Current liabilities are all obligations due within the next 12 months including accounts payable, accrued expenses, short-term loans, and the current portion of long-term debt.

A Worked Example

Using the same distribution company from the Current Ratio example:

  • Cash: $95,000

  • Accounts receivable: $310,000

  • Short-term investments: $0

  • Total quick assets: $405,000

  • Total current liabilities: $365,000

Quick Ratio = $405,000 / $365,000 = 1.11

Compare this to the current ratio of 1.67 for the same company. The difference — 0.56 — represents the impact of inventory on the liquidity picture. This company is less liquid than the current ratio suggests once inventory is excluded.

What Is a Good Quick Ratio?

A quick ratio of 1.0 or above is generally considered adequate — it means the business can cover its current liabilities without relying on inventory sales. Below 1.0 means the business depends on selling inventory to meet short-term obligations, which increases risk. Above 1.5 is considered strong.

Retail and manufacturing businesses typically run lower quick ratios because they carry significant inventory by nature. Service businesses typically run higher quick ratios since they carry little or no inventory.

Quick assets
Cash & cash equivalents
$
Accounts receivable
$
Short-term investments
$
Total quick assets: $405,000
Current liabilities
Accounts payable
$
Accrued expenses
$
Short-term loans
$
Current portion of long-term debt
$
Other current liabilities
$
Total current liabilities: $365,000
For comparison (optional)
Inventory (to calculate current ratio)
$
Other non-quick current assets
$
Quick assets
$405,000
Current liabilities
$365,000
Quick ratio
1.11
Current ratio for same data: 1.67  |  Gap: 0.56

Using the Quick Ratio Alongside the Current Ratio

The most useful way to read the quick ratio is in comparison to the current ratio. A large gap between the two signals heavy inventory reliance. A small gap suggests the business's liquidity is not heavily dependent on moving inventory. Track both over time and watch for the gap widening, which can signal inventory buildup or slowing sales.