Quick Ratio (Acid-Test) Wednesday, June 27, 2007
Posted by ei-forum in Understanding Ratios.trackback
The Quick Ratio is calculated by dividing Current Assets minus Inventories by Current Liabilities.
Like the Current Ratio, the Quick Ratio (or Acid-Test) is a measure of how well the comapny can pay off its liabilities. However, due to the fact that we subtract the inventory, the ratio becomes a more rigorous test of liquidity. The reason we take away the inventory is becasue it is generally considered as the least liquid of the current assets.
Ideally, the ratio will be equal to “1″ or lower. However, if the result in lower than 0,8, then the business could end up suffering financial difficulties. Furthermore, if the Quick Ratio is significantly lower that the Current Ratio, then this is an indication that the company is heavily dependent upon inventory.
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