Definition of Quick Ratio
The quick ratio is a financial ratio used to gauge a company's liquidity . The quick ratio is also known as the acid test ratio .
The quick ratio compares the total amount of cash and cash equivalents + marketable securities + accounts receivable to the amount of current liabilities .
Example of Quick Ratio
If a company's cash and cash equivalents + marketable securities + accounts receivable adds up to $1,000,000 and the amount of the company's current liabilities is $1,200,000, its quick ratio is 0.83 to 1 ($1,000,000/$1,200,000 = 0.83).
The quick ratio differs from the current ratio in that some current assets are excluded from the quick ratio. The most significant current asset that is excluded is inventory . The reason is that inventory might not be "quick" to turn to cash.
