Glossary · UK
What is Quick Ratio (Acid Test Ratio)?
A stricter liquidity test than the current ratio, excluding stock, to show how easily debts could be paid from readily available assets.
Full Definition
The quick ratio, also called the acid test ratio, is a more conservative version of the current ratio that strips stock/inventory out of current assets before comparing them with current liabilities, on the basis that stock can be slow, difficult, or uncertain to convert into cash at full value, particularly in a downturn or for a business with slow-moving or perishable stock. A quick ratio of 1 or higher indicates a business could, in principle, cover its short-term debts using cash, near-cash investments and money owed by customers alone, without needing to sell any stock, which lenders and suppliers often view as a sign of stronger short-term resilience than the current ratio alone provides. Businesses with naturally high stock levels, such as retailers or wholesalers, will typically show a much lower quick ratio than current ratio, and this gap is not necessarily a problem if the stock genuinely does sell quickly -- but a persistently very low quick ratio combined with slow-moving stock can be an early sign that a business may struggle to pay bills on time even if its balance sheet looks reasonably healthy at first glance.
How Quick Ratio (Acid Test Ratio) is calculated
Quick ratio = (Current assets - Stock) / Current liabilities- Current assets
- Cash, stock/inventory and debtors expected to convert to cash within 12 months.
- Stock
- Inventory, which is excluded because it can be slow or uncertain to sell.
- Current liabilities
- Debts and obligations due within 12 months.
Worked example: A business with GBP 120,000 current assets (including GBP 40,000 of stock) and GBP 80,000 current liabilities has a quick ratio of (120,000 - 40,000) / 80,000 = 1.0.