Quick Ratio (QuR) and Acid-Test Ratio

Quick Ratio (QuR) and Acid-Test Ratio

The Quick Ratio (QUR) is a model or a method used for measuring the liquidity of a company by calculating the ratio between all assets quickly convertible into cash and all current liabilities.

It specifically excludes inventory.

Quick Ratio is an indicator of the extent to which a company is able to pay current liabilities without relying on the sale of inventory.

Formula for the Quick Ratio QUR

                  Cash + Accounts Receivable
Quick Ratio = ---------------------------------
                      Current Liabilities

            Cash + Accounts Receivable
               + Cash Equivalents
       = ----------------------------------
             Accruals + Accounts Payable
                  + Notes Payable

Values of Quick Ratio QUR

In most cases a QUR of 1:1 or higher indicated a good financial health and suggests that a company does not have to rely on the sale of inventory to pay the bills.

Other names related to the Quick Ratio QUR

This ratio is also known as the Acid-Test Ratio.

Disadvantages of using the Quick Ratio QUR

A thing to remember when using the QUR model is that it ignores timing of both cash received and cash paid out.

Let's assume a company with no bills due today, but it has a lot of liabilities that are due tomorrow. The company also owns a lot of inventory (part of its current assets). However the inventory cannot be easily converted into cash.  It takes some time to sell it.  This company may show a good quick ratio but can not be considered as having a good liquidity.

Alternative calculation

                 Current Assets - Inventories
Quick Ratio = ---------------------------------
                      Current Liabilities

Is there any other ratio related to this metric?

Yes, financial practice know many other ratios, for example the following:

Free Cash Flow (FCF),

Cash Asset Ratio (CAR),

Capital Adequacy Ratio (CAR),

Current Ratio (CuR),

Return On Assets (ROA),

Return on Investment (ROI),

or the Return On Equity (ROE).


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