Quick Ratio

View Financial Glossary Index

Definition

The Quick (aka acid) Ratio is used as a solvency metric to determine a firm's ability to pay down current liabilities with its cash, short term equivalents, and accounts receivables. This ratio was nicknamed quick to describe the "quick assets" needed to pay down any current liabilities.

Firms with high quick ratios often indicate the firm is solvent and able to pay current liabilities quickly.
Firms with low quick ratios may mean that the firm is potentially having solvency issues.

Other similar solvency ratios include :
Cash Ratio - Measures the amount of cash that can be used to pay liabilities (stricter)
Current Ratio - Measures the amount of current assets over current liabilities (more lenient).

The quick ratio is more lenient than the cash ratio, but stricter than the current ratio. The cash ratio is the most strict because it only calculates the amount of cash and short term equivalents to pay off current liabilities. The quick ratio assumes accounts receivables to be a liquid enough asset that can potentially be used to pay off current liabilities. Companies with poor credit policies (managing accounts receivables) may have high quick ratios, but not be as solvent as they appear.

Formula

YCharts calculates this formula by adding Cash, Short Term Equivalents, and Accounts Receivables / Current Liabilities.

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