Quick Ratio (Acid Test)
Ratio of liquid assets (excluding inventory) to current liabilities, a stricter measure of short-term liquidity
What is Quick Ratio (Acid Test)?
Quick ratio, also called the acid test, compares a business's most liquid current assets with its current liabilities. It excludes inventory, which may be slow to convert into cash.
It is a stricter test of short-term financial health than the current ratio.
How this KPI is measured
- Function
- Finance
- Sub-function
- Cash Flow Management
- Industry
- All Industries
- Type
- Lagging
- Impact
- Risk
- Unit
- x
- Measurement frequency
- Monthly / Quarterly
- Formula
- (Current assets − Inventory) / Current liabilities
How to calculate it
Subtract inventory from current assets, and divide the result by current liabilities.
For example, with current assets of 3,000,000, inventory of 1,000,000 and current liabilities of 2,000,000, the quick ratio is (3,000,000 - 1,000,000) / 2,000,000 = 1.0.
A ratio of at least 1 suggests the business can meet short-term obligations without selling stock. Interpret with the industry in mind.
Where it is used
Testing liquidity strictly
See the ability to pay without selling stock.
Lender assessments
Support credit decisions.
Monitoring trends
Watch for weakening liquidity.
How to improve it
Tips and common mistakes
- Some industries with fast-moving stock can operate below 1.
- Check quality of receivables.
- Use with current ratio.
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