quick ratio
A stricter liquidity measure than the current ratio, excluding inventory from current assets to assess a company's ability to meet short-term obligations with its most liquid assets.
Example
“The retailer's quick ratio of 0.8 was concerning — it couldn't cover current liabilities without selling inventory.”
Memory Tip
QUICK ratio = assets you can QUICKLY convert to cash. Excludes slow-moving inventory.
Why It Matters
The quick ratio helps you understand whether a company or individual has enough liquid funds to pay bills without needing to sell inventory or other assets. This matters because it reveals the true financial health and ability to handle emergencies without disrupting normal business operations.
Common Misconception
Many people think the quick ratio and current ratio are interchangeable measures of liquidity. However, the quick ratio is more conservative because it removes inventory, which can take time to sell, making it a better indicator of immediate payment ability.
In Practice
A retail store has 50,000 dollars in cash, 30,000 dollars in accounts receivable, and 120,000 dollars in inventory, with 60,000 dollars in current liabilities. The quick ratio would be (50,000 plus 30,000) divided by 60,000, equaling 1.33, meaning the store can cover all short-term debts without selling any merchandise.
Etymology
QUICK (fast, liquid) RATIO. Measures assets that can QUICKLY be converted to cash.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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