Quick Ratio
The quick ratio, also known as the acid-test ratio, is a measure of a company’s liquidity. It is calculated by dividing a company’s total assets minus its inventories by its total liabilities. The quick ratio is used to measure a company’s ability to pay its short-term obligations with its most liquid assets. It is a more stringent measure of liquidity than the current ratio, which includes inventories in its calculation.
History of the Quick Ratio
The quick ratio was first developed by Benjamin Graham, the father of value investing. He believed that a company’s current assets should be sufficient to cover its current liabilities. The quick ratio is a measure of a company’s ability to meet its short-term obligations with its most liquid assets. It is a more stringent measure of liquidity than the current ratio, which includes inventories in its calculation.
Comparison Table
| Ratio | Calculation |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Quick Ratio | (Current Assets – Inventories) / Current Liabilities |
Summary
The quick ratio is a measure of a company’s liquidity. It is calculated by dividing a company’s total assets minus its inventories by its total liabilities. The quick ratio is used to measure a company’s ability to pay its short-term obligations with its most liquid assets. It is a more stringent measure of liquidity than the current ratio, which includes inventories in its calculation. For more information about the quick ratio, you can visit Investopedia, The Balance, and other financial websites.
See Also
- Current Ratio
- Cash Ratio
- Working Capital Ratio
- Cash Flow Ratio
- Debt to Equity Ratio
- Debt to Assets Ratio
- Return on Assets Ratio
- Return on Equity Ratio
- Gross Profit Margin
- Net Profit Margin
