Quick Ratio
Candlefocus EditorThe quick ratio is calculated using the following formula:
Quick Ratio = (Cash + Accounts Receivable + Marketable Securities) / Total Current Liabilities
For example, a company with cash of $1,000; accounts receivable of $2,000; marketable securities of $3,000; and total current liabilities of $5,000 would have a quick ratio of 2.
Generally, anything above 1 is considered a good quick ratio, and below 1 is considered a cause for concern. While the higher the ratio is the better, the interpretation of the ratio isn't as straightforward since it depends on the industry. For instance, a relatively high quick ratio of 2 in a retail store would generally be considered healthy, but in a real estate development firm, the same ratio could be cause for concern.
The quick ratio is mostly used to complement the current ratio analysis. Analysts usually use the current ratio to assess a company’s liquidity and the quick ratio serves to further verify the company’s short-term liquidity position. A company's poor quick ratio should raise red flags for potential lenders, investors, and credit rating analysts, especially when the company’s current ratio isn't much better. Together, the two ratios provide lenders and investors with a more comprehensive view of a company’s short-term solvency and liquidity position.