What is the quick ratio?
The quick ratio is a stricter version of the [current ratio](/glossary/current-ratio). It leaves out inventory because stock may take time to sell, or sell at a discount, in a crunch.
Formula
Quick ratio = (Cash + Marketable securities + Accounts receivable) ÷ Current liabilities
or
Quick ratio = (Current assets − Inventory − Prepaid expenses) ÷ Current liabilities
Example
A business has $30,000 cash, $50,000 of receivables, $60,000 of inventory and $10,000 of prepaid expenses. Current liabilities are $100,000.
- Current ratio = 150,000 ÷ 100,000 = 1.5
- Quick ratio = 80,000 ÷ 100,000 = 0.8
It depends on selling stock to meet all of its short-term obligations.
How to interpret it
- 1.0 or above: can cover short-term debts without selling inventory.
- Below 1.0: relies on inventory sales or new financing; not always a problem in fast-turnover retail.
How to improve it
- Collect receivables faster.
- Hold more cash or short-term investments.
- Reduce short-term borrowing.