What is the Quick Ratio?

Define Quick Ratio In Simple Terms

TheQuick Ratio is a measure of a company’s ability to pay its short-term debts with its most liquid assets.

The quick ratio is calculated by taking the sum of a company’s cash, cash equivalents, marketable securities, and accounts receivable, and dividing by the sum of its current liabilities.

Quick Ratio Formula

Where:

1.) C&CE is cash and cash equivalents

2) MS is marketable securities

3.) AR is accounts receivable.

Quick Ratio Example

For example, say that a company has cash and cash equivalents of \$5 million, marketable securities worth \$3 million, and another \$2 million in accounts receivable for a total of \$10 million in highly liquid assets.

If the company has \$5 million in current liabilities, then its quick ratio is 2.0.

Higher ratios always indicate greater liquidity. However, the quick ratio alone does not give the full picture of a company’s financial health and should be considered alongside other metrics, such as the earnings-per-share or rate-of-return on investments.

Quick Ratio Definition FAQs

The Quick Ratio is a measure of a company’s ability to pay its short-term debts with its most liquid assets.
The quick ratio is calculated by taking the sum of a company’s cash, cash equivalents, marketable securities, and accounts receivable, and dividing by the sum of its current liabilities.
Higher ratios always indicate greater liquidity and a greater ability to pay short term financial obligations.
The quick ratio alone does not give the full picture of a company’s financial health and should be considered alongside other metrics, such as the earnings-per-share or rate-of-return on investments.