What is the Quick Ratio?
Define Quick Ratio In Simple Terms
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.
Quick Ratio Formula
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.