Quick Ratio (Acid Test)

Quick Ratio (Acid Test)

Formula

$$\text{Quick ratio} = \frac{\text{Cash} + \text{Marketable securities} + \text{Net receivables}}{\text{Current liabilities}}$$

Explanation

• A stricter liquidity test: excludes inventory & prepayments
• Measures ability to pay short-term debts using most liquid assets only.

Satisfactory level / rule of thumb

• Common rule: 1 : 1 is considered acceptable
• Lower than 1:1 may be risky if inventory is not very liquid.

Industry norm

• Businesses with fast-moving stock and strong cash flow may manage with a lower quick ratio
• Businesses with slow inventory need a stronger quick ratio.

Example

• Cash = RM40,000; Marketable securities = RM10,000; Receivables = RM50,000
• Current liabilities = RM80,000

$$\text{Quick ratio} = \frac{40,000 + 10,000 + 50,000}{80,000} = \frac{100,000}{80,000} = 1.25 : 1$$