Quick ratio

From Wikipedia, the free encyclopedia

For other uses, see Acid test.

In finance the Acid-test or quick ratio or liquid 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. The ratio compares a company's cash and short-term investments to the financial liabilities the company is expected to incur within a year's time.

\mbox{Current Ratio} = \frac {\mbox{Current Assets}} {\mbox{Current Liabilities}}

OR

\mbox{Quick (Acid Test) Ratio} = {\mbox{Current Assets} - \mbox{(Inventory}+ \mbox{(Staff Salaries} + \mbox{Supplies} +\mbox{Prepayments)}\over \mbox{Current Liabilities} - \mbox{Bank overdraft}}

Generally, the acid test ratio should be 1:1 or better, however this varies widely by industry. [1]

[edit] See also

[edit] References

  1. ^ Tracy, John A. (2004). How to Read a Financial Report: Wringing Vital Signs Out of the Numbers. John Wiley and Sons, pp. 173. ISBN 0471646938.