A stricter liquidity measure than the current ratio, excluding inventory from current assets to show a company's ability to meet short-term obligations with its most liquid assets.
The Quick Ratio (or Acid-Test Ratio) measures whether a company can pay its current liabilities without relying on selling inventory. It's a more conservative test of liquidity because inventory may not be easily convertible to cash at full value. Quick assets include: cash, marketable securities, and accounts receivable — but NOT inventory or prepaid expenses. A quick ratio of 1.0 or higher is generally considered healthy. It's especially important for businesses with slow-moving inventory.
A company has: Current Assets ₹25,00,000 (including Inventory ₹8,00,000 and Prepaid ₹50,000). Current Liabilities ₹15,00,000. Quick Ratio = (25,00,000 − 8,00,000 − 50,000) ÷ 15,00,000 = 1.1. They can just meet obligations without selling inventory.
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1.0 or higher is generally acceptable. Above 1.5 is strong. Below 0.5 is concerning. However, some industries like supermarkets operate successfully with low quick ratios because their inventory turns over very rapidly.
Inventory can be slow to sell, may become obsolete, and typically can't be converted to cash at full value in a hurry. The quick ratio tests whether a company can survive its short-term obligations even if inventory sales suddenly stopped.
A liquidity ratio that measures a company's ability to pay its short-term obligations using its short-term assets.
The difference between a company's current assets and current liabilities, representing the short-term liquidity available for day-to-day operations.
Assets that are expected to be converted to cash or consumed within one year or one operating cycle, whichever is longer.
Debts and obligations a business must pay within one year, including accounts payable, short-term loans, accrued expenses, and taxes owed.
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