Below 0.5 - tight
Heavy reliance on selling inventory or raising new financing to meet near-term obligations.
Definition
What is the quick ratio?
The quick ratio - also called the acid-test ratio - is current assets minus inventory, divided by current liabilities. It measures whether a company can cover its short-term bills using only its most liquid assets (cash, marketable securities, and receivables), without relying on selling inventory. A ratio of 1.0 means those liquid assets exactly cover current liabilities.
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Short answer
The quick ratio is the current ratio's stricter sibling: it throws out inventory, which can be slow or impossible to sell at full value. For inventory-heavy businesses, the gap between the two ratios is the real liquidity question.
How to read the quick ratio
0.5-1.0 - adequate (industry-dependent)
Common and workable for businesses with fast inventory turns and reliable cash collection.
1.0-1.5 - healthy
Liquid assets comfortably cover near-term liabilities without leaning on inventory.
Above 1.5 - very liquid
Strong liquidity. Very high readings may mean cash and receivables aren't being put to work.
Why it can diverge sharply from the current ratio
A retailer with $3B in current assets, $1.8B of it inventory, against $1.5B of current liabilities, has a current ratio of 2.0 - which looks healthy. But its quick ratio is (3.0 - 1.8) / 1.5 = 0.8.
The inventory is doing the heavy lifting. If the company can't sell that inventory quickly and at full price, its real liquidity is tighter than the current ratio suggests. The bigger the gap between current and quick, the more a company's short-term safety depends on moving stock.
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Related
- What is the current ratio? - the broader liquidity measure that includes inventory.
- What is a good current ratio? - the benchmark ranges, and where the quick ratio is the better test.
- What is the cash conversion cycle? - how fast working capital actually turns into cash.
See liquidity in full context
invest-like reports liquidity and balance-sheet strength alongside valuation and quality on every stock, so one ratio never tells the whole story.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.