Quick ratio
The quick ratio checks whether a company holds enough cash and liquid investments to pay the obligations coming due in the next few months, even in an emergency.
Formula
Quick ratio, strict form
Quick Ratio = (Cash + Liquid Investments) ÷ Short-Term Liabilities
Textbook form
Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities
Benchmark: Must be above 1
Reading the number
Interest coverage looks at the whole year. The quick ratio looks at the next two to four months. It asks a blunt question: if every short-term bill fell due at once, could the company pay from what it can turn into cash immediately?
A reading of 2 means liquid assets are double the short-term liabilities; the company could pay them off twice over. A reading just under 1 is the bare minimum and should not go lower. The strict form above, which counts only cash and liquid investments, is the more conservative reading; the textbook form also counts receivables.
Indian example
Related ratios
Glossary terms
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