Quick ratio

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It has been suggested that Acid Test (Liquidity Ratio) be merged into this article or section. (Discuss)

Quick Ratio or Acid-Test Ratio:

$\mbox{Quick Ratio}/\mbox{Acid-Test Ratio} = \frac {\mbox{Quick Assets}} {\mbox{Current Liabilities}}$

$\mbox{Quick (Acid Test) Ratio} = {\mbox{Current Assets} - \mbox{Inventory}\over \mbox{Current Liabilities}}$

The Acid-test or quick ratio measures the ability of a company to use its "near cash" or quick assets to immediately extinguish its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. Such items are cash, marketable securities, and some accounts receivable. This ratio indicates a firm's capacity to maintain operations as usual with current cash or near-cash reserves in bad periods. As such, this ratio implies a liquidation approach and does not recognize the revolving nature of current assets and liabilities.

Compares a company's cash and short-term investments to the financial liabilities the company is expected to incur within a year's time.

Ideally the acid test ratio will be 1:1, but 0.8:1 is acceptable, any less and the business could suffer financial difficulties.