Quick Ratio

The quick ratio is (cash + cash equivalents + accounts receivable) / current liabilities. The quick ratio is a measure of the ability of a company to pay its short-term debts. The quick ratio includes accounts receivable because they are usually converted to cash in 90 days; but the quick ratio does not include inventories, which may take as long as a year to become cash. Indeed, the quick ratio, unlike the current ratio, only includes assets that can be quickly converted. As a result, the quick ratio is a particularly conservative measure of a company's bill-paying ability. As with all ratios, how high a quick ratio should be varies among industries, but usually a quick ratio of 1:1 or higher is considered good. In other words, a quick ratio of 100% tells creditors that the company could pay its immediate bills even if no inventory is converted to cash. Note that the quick ratio is also known as the acid test ratio.