A measure of a firm's liquidity & ability to meet its obligations. Quick ratio, often referred to as acid-test ratio, is obtained by subtracting inventories from current assets & then dividing by current liabilities.
Quick ratio is viewed as a sign of company's financial strength or weakness (higher number means stronger, lower number means weaker).
For example, if current assets equal Rs.1,50,00,000, current inventory equals Rs. 60,00,000, and current liabilities equal Rs.30,00,000, then quick ratio amounts to: (Rs.1,50,00,000 - Rs. 60,00,000) / Rs. 30,00,000 = 3. Since we subtracted current inventory, it means that for every dollar of current liabilities there are 3 dollars of easily convertible assets.
In general, a quick ratio of 1 or / more is accepted by most creditors; however, quick ratios vary greatly from industry to industry.
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