examines the relationship between specific current assets, called quick assets, and current liabilities.
The quick ratio, also known as the acid-test ratio, measures a company's ability to pay off its current liabilities with its most liquid assets. Quick assets typically include cash, marketable securities, and accounts receivable, as these assets can be quickly converted into cash to meet short-term obligations.
The formula for calculating the quick ratio is:
Quick Ratio = (Quick Assets) / (Current Liabilities)
A quick ratio of 1 or higher is generally considered healthy, as it indicates that a company has enough liquid assets to cover its short-term liabilities. A quick ratio below 1 may suggest that a company may struggle to meet its obligations.
By analyzing the relationship between quick assets and current liabilities, investors and analysts can gain insight into a company's short-term financial health and liquidity. A high quick ratio may indicate that a company is well-positioned to meet its short-term obligations, while a low quick ratio may suggest potential liquidity issues.