A quick ratio is a financial tool used to determine a company's short-term financial liquidity position. It assesses the ability of the company to pay its current liabilities using Near Cash Assets. This is sometimes referred to as the acid test ratio
Quick Ratio
Current Asset
-
Inventory
=
Prepaid Expense
Current Liabilitie
As long as the company has produced financial accounts, calculating this ratio is fairly simple.
Inventory can take longer to sell and receive cash, so it's best to leave it out of this calculation. We are looking for tangible assets that can be converted into cash and used to pay off debt.
It makes the ratio more reasonable by removing overdraft and cash credit.
It is more realistic than the current ratio because it does not include inventory or other current assets that are difficult to convert to cash, such as prepaid expenses.
The ratio also responds to seasonal business as inventory is excluded.