Quick ratio (acid test ratio)
Also called the acid test ratio or the cash ratio, the quick ratio indicates your company's ability to meet creditors’ immediate demands using its most liquid and current assets (quick assets). These can be cash or assets that can be converted quickly into cash, such as temporary investments and marketable securities. This ratio gives a more realistic picture of your business's ability to repay current obligations than the current ratio, as it excludes inventories and prepaid items for which you cannot obtain cash immediately. It is usually used as a supplement to the current ratio.
A comparatively low ratio can mean that your company might have difficulty meeting your obligations and may not be able to take advantage of opportunities that require quick cash. Paying off your liabilities can improve this ratio; you may want to delay purchases or consider long‑term borrowing to repay short-term debt. You may also want to review your credit policies with clients and possibly adjust them to collect receivables more quickly.
A higher ratio may mean that your capital is being underutilized and could prompt you to invest more of your capital in projects that drive growth, such as innovation, product or service development, R&D, or international marketing.
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