The quick ratio, also known as the acid-test ratio, is a financial metric used to measure a company’s short-term liquidity—its ability to meet immediate obligations without relying on the sale of inventory. It provides a more conservative view of liquidity compared to the current ratio by excluding less liquid current assets.

The formula is:
Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) ÷ Current Liabilities

Or more commonly:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities

A quick ratio of 1 or higher generally indicates that a company has enough liquid assets to cover its short-term liabilities. For example, a ratio of 1.2 means the company has $1.20 in liquid assets for every $1 of current liabilities.

The quick ratio is especially important for businesses in industries where inventory may take longer to convert into cash, such as manufacturing or retail. By focusing only on highly liquid assets, the ratio provides a clearer picture of a company’s immediate financial health.

In summary, the quick ratio is a vital tool for assessing whether a company can quickly pay its bills without depending on future sales, making it valuable for investors, creditors, and financial managers.