Definition (canonical)
The quick ratio, also called the acid-test ratio, measures whether a company can cover its short-term liabilities with its most liquid assets — cash, marketable securities and receivables — WITHOUT relying on selling inventory: quick ratio = (current assets − inventory) / current liabilities. A value of 1.0 means liquid assets exactly cover near-term debts; below 1.0 warns of a possible cash squeeze.
Why it excludes inventory
The quick ratio's whole point is caution. It strips out inventory because inventory is the least reliable current asset to turn into cash quickly — it may be slow-moving, obsolete, or sellable only at a discount in a crunch. By counting only cash, near-cash and receivables, it answers a harsher question than the current ratio: if sales stopped tomorrow, could you still pay suppliers and lenders? That makes it a favourite of creditors and a core read on short-term liquidity.
Quick ratio vs current ratio
Both compare current assets to current liabilities, but the current ratio includes inventory while the quick ratio excludes it. A business can show a comfortable current ratio of 2.0 yet a quick ratio of 0.6 if most of its current assets are stock — a classic hidden risk in retail and manufacturing. Reading them together is the insight: a wide gap between the two flags heavy dependence on selling inventory, which you can trace back to the balance sheet.
Benchmark and limits
A quick ratio around 1.0 is generally healthy, though norms vary — service businesses run higher (little inventory), retailers lower. But context matters: a very high quick ratio can mean idle cash or bloated receivables (customers not paying), not strength. And it's a snapshot from one balance-sheet date, so pair it with cash-flow trends rather than trusting a single number. For businesses with predictable collections, a figure slightly below 1.0 can still be safe.
FAQ
What is a good quick ratio? Around 1.0 or above is typically healthy, but it depends on industry — service firms run higher, inventory-heavy retailers lower.
How is it different from the current ratio? The current ratio includes inventory; the quick ratio excludes it, giving a stricter view of liquidity.
Why leave out inventory? Because inventory is the hardest current asset to convert to cash quickly and reliably.
Can a quick ratio be too high? Yes — it may signal idle cash or uncollected receivables rather than genuine strength.
Related: Liquidity · Working capital · Balance sheet Reviewed: 2026-08-02 · Sources: financial ratios canon