The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets.
The acid test of finance shows how well a company can quickly convert its assets into cash in order to pay off its current liabilities. It also shows the level of quick assets to current liabilities.
- More stringent than Current Ratio to measure ability to meet short-term obligations without selling long-term assets
- Whether to include ‘Current Receivables’ is debatable. It depends on credit terms given to customers. Some are 30 days, some 90, some 120.
- Total accounts receivable amount actually received may be slightly below book value because of discounts for early payment and credit losses.
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Higher quick ratios are more favorable for companies because it shows there are more quick assets than current liabilities. A quick ratio of 2.33 shows that the company has 2.33x as many quick assets than current liabilities. This also shows that the company could pay off its current liabilities without selling any long-term assets.