Quick ratio measures the liquidity of the company. It is similar to current ratio but a bit more restrictive in what it considers to be liquid. Inventory is part of the current asset used for current ratio. However, it is explicitly excluded from the calculation of quick ratio.
Quick Ratio, also called Acid Test Ratio or Liquid Ratio measures a business’ ability to use its cash and highly liquid assets to completely retire its current liability.
Quick ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities
A quick ratio greater than 1 can indicate a healthy and liquid operation. A quick ratio lower than 1 can indicate an operation that may be close to a cash crunch.
Learn about liquidity in small cap stocks
It is important to keep in mind that the payment terms in the Account Receivable and the payment terms in the Account Payable (part of the current liability) can skew the meaning of the ratio, if these terms are not matched.
For example, a short AR payment term matched with a long AP payment term means that even if the current liability may be higher, if it is spread out over a longer period of time, the company may be running with healthy liquidity, even if the quick ratio is lower than 1.
Similar conclusions apply in the reverse.
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