Quick Ratio: An indicator of a company’s short-term liquidity.
This ratio, also called “acid test” or “liquid” ratio, considers only cash, marketable securities (cash equivalents) and accounts receivable because they are considered to be the most liquid forms of current assets. A Quick Ratio less than 1.0 implies the company is likely to have problems paying its bills and may be dependent on short term loans to pay its bills which makes the problem worse and lowers the Quick Ratio further. The higher the quick ratio, the better the company can meet its obligations to pay off its liabilities. This ratio is an important metric often considered as part of potential loan evaluations by banks. It is an expression of the value of a company if its liquid assets were to be immediately converted to cash.
Quick Ratio Formula: Quick Ratio = (cash + accounts Receivable) / Current Liabilities