Quick Ratio (Acid-Test Ratio)
The strictest test of short-term survival
Definition
The quick ratio (also called the acid-test ratio) is a more stringent liquidity measure than the current ratio. It excludes inventory and prepaid expenses from current assets, leaving only the most liquid assets: cash, short-term investments, and receivables. It tests whether a company can meet short-term obligations without selling inventory. The quick ratio is considered more conservative because inventory can be slow to convert to cash.
Formula / Rules
Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities
Example
Using the same retailer: $500M current assets minus $200M inventory = $300M quick assets. Current liabilities = $300M. Quick Ratio = $300M ÷ $300M = 1.0. This is tighter than the 1.67 current ratio — the company can just barely cover short-term liabilities without selling inventory. A quick ratio below 0.5 is a warning sign.
Related Terms
Frequently Asked Question
What is the quick ratio?
The quick ratio measures liquidity using only the most liquid assets (cash, receivables) — not inventory. It is more conservative than the current ratio and shows if a company can pay short-term debts immediately.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.