The quick ratio (also called acid test ratio) measures the ability of a business to pay its current liabilities when they come due with only quick assets. Quick assets are assets that can be converted to cash in less than 90 days. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets.
The quick ratio is calculated by adding cash, cash equivalents, short-term investments, and current receivables together then dividing them by current liabilities.
Quick Ratio = Cash + Cash Equivalents + Short Term Investments + Current Receivables / Current Liabilities
If a business has enough quick assets to cover its current liabilities, the company will be able to pay off its obligations without having to sell off any long-term or capital assets.
Since most businesses use their long-term assets to generate revenues, selling off these capital assets will not only hurt the company it also shows investors that current operations are not making enough profits to pay off current liabilities.<< Back to Glossary Index