Quick ratio
Learn what the quick ratio is, how to calculate it, and what a good result looks like for your business.
February 2024 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- The quick ratio, also called the acid test ratio, shows whether your business can cover its short-term debts using its most liquid assets.
- You work it out by dividing your quick assets by your current liabilities, leaving out inventory and prepaid expenses.
- A ratio above 1.0 generally means you can meet what you owe over the next 3 months, though a very high figure may signal idle cash.
- Comparing your ratio against businesses in the same industry gives you a more useful picture than a single number on its own.
What is the quick ratio?
The quick ratio measures whether your business can pay its short-term debts, usually those due within 3 months, using assets you can turn into cash quickly. It's also known as the acid test ratio.
-calculation-1.1708626946524.png)
Quick ratio formula Version 1.
It gives you a fast read on short-term financial health without relying on stock or other assets that take time to sell.
-calculation-2.1708626946541.png)
Quick ratio formula Version 2.
Quick ratio formula
There are 2 ways to write the quick ratio formula, and both give you the same result. Each one divides your most liquid assets by your current liabilities.
Version 1: (cash + cash equivalents + short-term investments + accounts receivable) / current liabilities = quick ratio
Version 2: (current assets - inventory - prepaid expenses) / current liabilities = quick ratio
How to calculate the quick ratio
Calculating the quick ratio takes a few short steps once you have your balance sheet to hand. Follow this sequence to work out your figure.
- Add up your quick assets: cash, cash equivalents, marketable securities, and net accounts receivable.
- Find your total current liabilities, which are the debts due within the next 3 months.
- Divide your quick assets by your current liabilities to get the ratio.
Here's a simple worked example in New Zealand dollars. Say you hold $20,000 in cash and $15,000 in accounts receivable, giving you $35,000 in quick assets. With current liabilities of $28,000, your quick ratio is $35,000 divided by $28,000, or 1.25.
Liquid assets used in the quick ratio
Quick assets are the items you can convert to cash within about 3 months. These are the liquid assets that count towards the ratio.
- Cash: banknotes, coins, and bank balances you can access straight away
- Cash equivalents: short-term investments such as certificates of deposit
- Marketable securities: financial assets you can buy and sell easily on a public market, such as stocks and bonds
- Net accounts receivable: the total amount your customers owe you
Inventory and prepaid expenses are left out because you can't reliably turn them into cash within 3 months.
What is a good quick ratio?
A quick ratio above 1.0 generally means your business can cover its short-term debts from its liquid assets. It's a reassuring sign for lenders and investors.
A very high ratio may mean your cash isn't being put to use, for example reinvested to build working capital or fund growth. A ratio below 1.0 can signal possible liquidity risk, so it's worth reviewing your assets and planning ahead.
Quick ratios vary by industry, so compare within the same sector. Retail businesses often run lower ratios because they rely heavily on inventory.
Quick ratio vs current ratio
The quick ratio and the current ratio both measure short-term financial health, but they cover different timeframes and assets. Knowing the difference helps you pick the right measure for the question you're asking.
- Quick ratio: covers roughly the next 3 months and excludes inventory and prepaid expenses
- Current ratio: covers the next 12 months and includes all current assets, including inventory
Because it strips out slower-moving assets, the quick ratio gives you a stricter view of your immediate ability to pay.
How to improve your quick ratio
If your quick ratio is lower than you'd like, a few practical habits can lift it over time. Each of these strengthens your short-term liquidity.
- Speed up receivables collection so customer payments arrive sooner and support healthier cash flow
- Reduce or renegotiate short-term liabilities to lower what you owe in the near term
- Manage inventory levels so less cash is tied up in stock
- Build a cash reserve to keep quick assets available when you need them
Limitations of the quick ratio
The quick ratio is useful, but it doesn't tell you everything about your finances. Keep these limitations in mind when you read your figure.
- It's a snapshot in time and can change as soon as money moves in or out
- It assumes your receivables will be collected on time, which isn't always the case
- It varies by industry, so compare like with like rather than across different sectors
Other liquidity ratios
The quick ratio is one of several liquidity ratios you can use to gauge short-term health. Another common one is the cash ratio.
The cash ratio is the strictest of them, dividing cash and cash equivalents by current liabilities. It shows whether you could cover your short-term debts using cash alone.
Track your liquidity ratios with Xero
Keeping an eye on your quick ratio is easier when your numbers stay up to date in one place. Xero's accounting software helps you track receivables, monitor what you owe, and view reports that make liquidity simple to check.
See how organised finances can support clearer decisions. Get one month free.
FAQs on quick ratio
Here are answers to some frequently asked questions about the quick ratio to help you apply it with confidence.
What is a good quick ratio?
A ratio above 1.0 is generally seen as healthy because it suggests you can meet short-term debts. What counts as good still depends on your industry norms.
What is the difference between the quick ratio and the current ratio?
The quick ratio looks at roughly 3 months and leaves out inventory, while the current ratio looks at 12 months and includes it. The quick ratio is the stricter of the two.
Why is inventory excluded from the quick ratio?
Inventory can take time to sell and may not fetch its full value in a rush. Leaving it out gives a more conservative view of what you could pay right now.
Can the quick ratio be too high?
Yes, a very high ratio can mean cash is sitting idle rather than funding growth. It's worth checking whether that money could work harder for your business.
Related terms
Learn more about the quick ratio
Handy resources
Advisor directory
You can search for experts in our advisor directory.
Balance sheet template
See where and how assets and liabilities are reported.
Push-button liquidity reporting
Check your current ratio whenever you like with Xero’s accounting dashboard.
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.