Quick Ratio, also known as the Acid-Test Ratio, is a key financial metric used to assess a company’s short-term liquidity position. It measures the ability of a business to meet its short-term liabilities using its most liquid assets — those that can be quickly converted into cash without significant loss in value.

Unlike the Current Ratio, the Quick Ratio excludes inventories and prepaid expenses from current assets, as these may not be readily convertible into cash. The formula for calculating the Quick Ratio is:

Quick Ratio = (Current Assets – Inventories – Prepaid Expenses) ÷ Current Liabilities

A Quick Ratio of 1 or higher generally indicates that the company has sufficient liquid assets to cover its short-term obligations. However, the ideal ratio can vary depending on the industry. For instance, companies in fast-moving consumer goods (FMCG) sectors may operate efficiently with a lower ratio due to quicker cash cycles, while capital-intensive industries may require higher ratios for financial stability.

This ratio helps investors, analysts, and creditors evaluate a company’s financial health and its ability to withstand short-term liquidity pressures. A lower ratio may signal liquidity challenges, while a very high ratio could indicate underutilized resources or excessive cash reserves.

In summary, the Quick Ratio is an essential liquidity indicator that provides a clear picture of a company’s financial flexibility. It enables better decision-making for stakeholders by highlighting whether a firm can meet its immediate obligations without depending on inventory sales or external financing.