The Quick Ratio

The quick ratio or asset test ratio is an indicators of a company’s short term liquidity. It measures a company’s ability to meet its short term obligations with its assets.

The formula looks like this

Quick Ratio (asset test ratio) = (Current Assets-Inventory) / (Current Liabilities)

This ratio is more conservative than the Current ratio because it takes out the inventory from its current assets. Inventory can be hard to sell for some companies; therefore taking it out of the equation can help us understand the least a company would be able to raise in a short period of time.

Typically you want to see a company with an asset test ratio above 1. This means the firm can meet or even exceed its short term liabilities.