Quick Ratio (Acid-Test Ratio) I. Liquidity ● live
The quick ratio — also called the acid-test ratio — measures a company's ability to meet its short-term liabilities using only its most liquid assets: cash, marketable securities, and receivables. It deliberately excludes inventory because inventory may not be quickly or easily converted to cash.
It is a more conservative and stringent test than the current ratio. A company might pass the current ratio test but fail the quick ratio test — a sign that liquidity depends heavily on inventory turnover.
Key Differences
When both ratios are computed, compare them side by side. A large gap between the two means the company's liquidity is heavily dependent on inventory. This is normal in retail or manufacturing but concerning in technology or services.
| Range | Signal | What it means |
|---|---|---|
| ≥ 1.0x | Strong | Company can fully cover current liabilities without relying on inventory sales. |
| 0.7x – 1.0x | Fair | Adequate but dependent on some inventory liquidation. Monitor closely. |
| < 0.7x | Weak | Significant liquidity risk if inventory cannot be sold quickly. |
| ≥ 2.0x | Review | Very high may indicate excess idle cash or slow receivables collection. |
Source: Damodaran Online, NYU Stern. Note that retail and manufacturing naturally have lower quick ratios due to large inventory holdings.
| Industry | Median | P25 | P75 |
|---|---|---|---|
| Technology | 1.60x | 1.10x | 2.40x |
| Consumer Goods | 0.80x | 0.50x | 1.30x |
| Healthcare | 1.50x | 1.00x | 2.20x |
| Energy | 0.90x | 0.60x | 1.30x |
| Financial Services | 1.00x | 0.80x | 1.30x |
| Telecommunications | 0.80x | 0.60x | 1.10x |
| Manufacturing | 0.90x | 0.60x | 1.40x |
| Retail | 0.50x | 0.30x | 0.80x |
| Company | Current Assets | Inventory | Current Liabilities | Quick Ratio | Signal |
|---|---|---|---|---|---|
| Tech firm | 200,000 | 10,000 | 80,000 | 2.38x | Strong |
| Manufacturer | 120,000 | 60,000 | 70,000 | 0.86x | Fair |
| Retailer | 80,000 | 65,000 | 50,000 | 0.30x | Weak |
| Supermarket chain | 50,000 | 40,000 | 45,000 | 0.22x | Context‑dependent |
Supermarkets routinely have very low quick ratios because their inventory (perishable goods) turns over daily and they collect cash at point of sale — a structural feature, not a red flag.
Why exclude inventory?
Inventory may be slow to sell, subject to obsolescence, or discounted heavily in a forced sale. The quick ratio tests whether a company can survive a liquidity crunch without selling inventory under pressure.
If my current ratio is strong but quick ratio is weak, what does it mean?
It means your liquidity depends heavily on inventory. Check your Inventory Turnover and Days Inventory Outstanding (DIO) ratios — if inventory is moving quickly, this gap is acceptable. If inventory is slow-moving, it is a red flag.
What should I include in current assets?
Cash, bank deposits, marketable securities, accounts receivable, and prepaid expenses. Exclude inventory and any illiquid items. For the quick ratio, only cash + receivables matter — inventory is explicitly removed in the formula.
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