The quick ratio is a commonly used financial ratio that shows the strength of a company’s liquidity, which is a company’s ability to pay its bills from cash or from assets that can be converted to cash quickly. The quick ratio is also known as the acid-test ratio. The formula for the ratio is:
Quick ratio = (cash and equivalents + marketable securities + accounts receivable) / current liabilities
For example, assume a company has $100,000 in cash, $200,000 in marketable securities, and $150,000 in accounts receivable. It’s current liabilities are $150,000. It’s quick ratio is:
($100,000 + $200,00 + $150,000) / $150,000 = 3
The higher the value the better. In this case, the company has $3 available for every $1 in current liabilities.