What does Quick Ratio mean?

This metric helps you estimate your company’s ability to pay off its outstanding bills (accounts payable) and short-term debt.

How it's calculated

This metric takes current assets and subtracts inventory from it, and then divides that total by current liabilities.

What's better?

Higher than 1.0

What it means

This metric helps you estimate your company’s ability to pay off its outstanding bills (accounts payable) and short-term debt. In other words, it tells you whether your company has enough cash and accounts receivable (customer invoices) to pay debts that are due within the next 12 months.

A quick ratio greater than 1.0 indicates that a business has enough cash available to pay off its short-term debts. For example, a company with a quick ratio of 2.0 has $2.00 of cash/liquid assets available to cover each $1.00 of current liabilities. A company in this situation has twice the cash/liquid assets it needs to cover its short-term debt. On the other hand, a company with a quick ratio of .5 only has fifty cents to cover each $1.00 of its short-term debt, which can spell disaster for that company if the debts suddenly become due and payable.

Quick ratio is very similar to current ratio. However, quick ratio doesn’t include inventory in calculating the assets you could potentially use to pay off your debts (because inventory can be difficult to sell quickly for cash). As a result, quick ratio is a more conservative estimate of how easily your company could pay off its short-term debts.

 

(Source: LivePlan.com)