What is the quick ratio and how is it calculated?

What is the quick ratio and how is it calculated?

The quick ratio, also known as the acid-test ratio, measures a company's ability to meet its short-term obligations with its most liquid assets. It's calculated by dividing current assets minus inventories by current liabilities.

Why is the quick ratio important for businesses?

The quick ratio is important because it provides insight into a company's short-term liquidity position, helping investors and creditors assess financial health.

What is considered a good quick ratio?

A quick ratio of 1 or above is generally considered good, indicating that a company can cover its short-term liabilities without relying on inventory.

Can you give me an example of how to calculate it?

Sure! If a company has current assets of $200,000, inventories of $50,000, and current liabilities of $100,000, the quick ratio would be (200,000 - 50,000) / 100,000 = 1.5.

What are the limitations of the quick ratio?

The quick ratio doesn't account for the timing of cash flows and may not reflect the true liquidity if receivables are slow to collect.