What Is Quick Ratio?

By Andrew Stotz | August 10, 2020

Definition of Quick Ratio

The quick ratio is a liquidity ratio that measures a firm’s ability to pay its short term liabilities with its most liquid assets.
Unlike the current ratio, the quick ratio is only calculated using the most liquid assets.
The ideal current ratio is 1:1.
The higher the ratio, the safer is the firm as that would mean they have excess cash.
However, if the ratio is too high, the firm has too much cash and should utilize it.

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The quick ratio can be calculated in two methods.
The first method is by adding Cash & equivalents, Marketable securities, Accounts receivable, and diving them by current liabilities.

Quick ratio = (Cash & equivalents + Marketable securities + Accounts receivable)/ Current liabilities

The second method is by subtracting inventory and prepaid expenses from current assets and dividing them by current liabilities.

Quick ratio = (Current asset – Inventory – Prepaid expense )/ Current liabilities

Assume that bleu waters has:
Current assets:
- Cash $ 30,000
- Account receivable $20,000
- Marketable security $20,000
- Prepaid expense $15,000
- Inventory $15,000
Current liabilities:
- Account payable $50,000
- Term debt $30,000
Bleu waters’ quick ratio is:
- ($ 30,000 + $20,000 + $20,000)/($50,000 + $30,000)= 0.875 OR
- ($100,000 – $15,000 – $15,000)/ ($50,000 + $30,000)= 0.875
The ratio indicates that the firm does not have enough liquid assets (cash) to pay for the current liabilities.

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