This article explains the quick ratio in a practical way. After reading you will understand the basics of this powerful financial management tool.
What is the Quick Ratio (QR)?
The quick ratio (also known as the quick assets ratio) is a calculation formula and liquidity indicator that measures to what extent a company can meet its short-term liabilities with liquid assets.
The most important difference with the current ratio is that the quick ratio excludes inventories. The reason for this is the conversion of inventories into cash.
The formula for the calculation is as follows:
Quick Ratio =
>Liquid Assets + debtors* / Short-Term Liabilities**
* = Liquid assets are resources that are readily available such as cash and money in bank accounts. Debtors are the customers who still have to settle their invoices.
** = Short Term Liabilities is the capital that has to be repaid within a short time for example a supplier’s credit, creditors or an overdraft facility.
With the exception of the inventories, this ratio focuses more on the liquid assets of an organization. The basis and use of this ratio is comparable with the current ratio i.e. the ability of an organization to meet their short-term obligations with their short-term assets.
It may be useful to compare the QR with the current ratio. If the current ratio is significantly higher, there is a clear indication the current assets of the organization are dependent on the inventories.
If you liked this article, then please subscribe to our Free Newsletter for the latest posts on models and methods.
Berger, A. N., & Udell, G. F. (1995). Relationship lending and lines of credit in small firm finance. Journal of business, 351-381.
Parrino, R., Kidwell, D. S., & Bates, T. W. (2009). Fundamentals of corporate finance. John Wiley & Sons.
Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance. McGraw-Hill Education.
How to cite this article:
Van Vliet, V. (2012). Quick Ratio. Retrieved [insert date] from ToolsHero: https://www.toolshero.com/financial-management/quick-ratio/
Add a link to this page on your website:
<a href="https://www.toolshero.com/financial-management/quick-ratio/">ToolsHero.com: Quick Ratio</a>
Did you find this article interesting? Your rating is more than welcome or share this article via Social media! ...
Do you want full access to this article?
By joining our learning platform, you will get unlimited access to all (1000+) articles, templates, videos and many more!
Already member? Log in below