Quick Ratio

Definition

The quick ratio or acid test is a health factor. It determines a companies short-term liquidity by comparing its total assets, less inventory, to its total liabilities. The quick ratio assumes that inventory is not liquid and can not be used to cover short term debt obligations. A higher quick ratio is preferential and a higher value generally indicates a lower risk to investors. 

Asset 19@2x-8

The numerator of the equation (current assets – inventory) are the cash and cash-like holdings of the company which can be sold in 90 days or less. The quick ratio a better indication of a companies short term liquidity than the current ratio, due to its inclusion of the inventory in the calculation.