Quick Ratio (Acid-Test Ratio)

The quick ratio, or acid-test ratio, answers a sharper question than the current ratio: if this company had to pay its bills without selling another unit of inventory, could it? It counts only the most liquid current assets — cash, marketable securities, and accounts receivable — against current liabilities. Inventory and prepaid expenses are excluded because they cannot be turned into cash quickly at full value.

The gap between the current ratio and the quick ratio is itself diagnostic. A company with a 2.0 current ratio and a 0.6 quick ratio is heavily inventory-dependent; its ability to pay you rests on inventory continuing to sell at expected prices and pace. That profile is common in building materials distribution and retail, and it becomes dangerous in downturns when inventory demand and inventory value fall at the same time.

As a rule of thumb, a quick ratio at or above 1.0 is comfortable, 0.7 to 1.0 warrants attention to the receivables quality behind it, and below 0.5 suggests the company operates on float — paying this month's bills with next month's collections. When reviewing a customer with a thin quick ratio, look at their own DSO and aging: if their customers pay slowly, your invoice is queued behind everyone else's.