What is the quick ratio?

February 2024 | Published by Xero

Quick ratio (definition)

The quick ratio reflects a business’s ability to make bill and loan payments in the short term (three months).

The quick ratio (also called the acid test ratio) tells a business if it can cover its debts for the coming quarter (three months). In this respect it’s similar to the current ratio, which does the same job but over a 12-month period.

In accounting terms, the quick ratio determines if a business’s short-term (or current) liabilities – the amounts it owes in the coming three months – can be covered by its liquid assets.

Liquid assets include cash and things that can be changed into cash within three months. They ignore assets that may be difficult to liquidate quickly, such as inventory.

There are two formulas for calculating the quick ratio:

Version 1:

Sum of cash, cash equivalents, short-term investments and accounts receivable, divided by current liabilities = quick ratio

Quick ratio formula Version 1.

Version 2:

Formula shows current assets minus inventory and prepaid expenses, divided by current liabilities, equals quick ratio.

Quick ratio formula Version 2.

Liquid assets used in the quick ratio

  • Cash: Banknotes and coins and balances in bank accounts that can be accessed quickly
  • Cash equivalents: Securities used for short-term investments, such as certificates of deposit
  • Prepaid expenses: Future expenses paid ahead of time, such as rent and insurance
  • Marketable securities: Financial assets that can easily be bought and sold via a public market, such as stocks and bonds
  • Net accounts receivable: The total amount of money owed by customers to a business

What the quick ratio means for the business

A quick ratio above 1.0 generally indicates that the business can pay its debts.

A business with a high quick ratio can look more attractive to investors and can sometimes get better interest rates from lenders. But if it’s too high, it could also mean the business isn’t reinvesting its cash or putting it to use.

If the business has a quick ratio less than 1.0, it may need to consider its current assets, assess the risk, and decide if it has enough liquid assets. If not, it needs to prepare in case this becomes a problem for continuing in business.

Quick ratios can vary by industry. Retail stores, for example, have low quick ratios due to their dependence on inventory. It’s therefore best to compare quick ratios with businesses in the same industry.

Other liquidity ratios

There are two other ratios:

Current ratio (working capital ratio): Current assets (cash, accounts receivable, and any assets that could be sold within 12 months) divided by current liabilities (debts due to be paid within 12 months).

Cash ratio: Cash and cash equivalents divided by current liabilities.

Learn more in our guide on liquidity ratios.

See related terms

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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.