Last reviewed: July 2026.
The quick ratio, also called the acid-test ratio, measures whether a business can cover current liabilities using its most liquid current assets without depending on the sale of inventory. It is useful because inventory can take time to sell and may not realise its recorded amount.
The common formula is:
Quick ratio = (Current assets − Inventory) ÷ Current liabilities
Some analysts also exclude prepayments because they cannot normally be converted into cash to pay liabilities. Always state the formula used.
Worked quick-ratio example
| Item | Amount (CU) | Included in quick assets? |
|---|---|---|
| Cash | 30,000 | Yes |
| Trade receivables | 70,000 | Yes, subject to collectability review |
| Short-term liquid investment | 20,000 | Usually yes if readily realisable |
| Inventory | 80,000 | No |
| Prepayments | 10,000 | Usually excluded from a strict acid-test calculation |
| Current liabilities | 100,000 | Denominator |
Using cash, receivables and the short-term investment, quick assets are 120,000 CU. The quick ratio is therefore:
120,000 ÷ 100,000 = 1.20:1
This means the entity reports 1.20 CU of quick assets for each 1 CU of current liabilities. It does not guarantee that every liability can be paid immediately because receivables may be late or uncollectible and investments may be subject to market or access restrictions.
Quick ratio versus current ratio
The current ratio includes all current assets, while the quick ratio removes inventory and, in stricter calculations, prepayments. A large gap between the two ratios may indicate that inventory forms a substantial part of working capital.
Read the companion guide to the current ratio and compare both figures with operating cash-flow ratios.
What is a good quick ratio?
There is no universal safe number. A ratio around 1:1 is often used as a reference point, but acceptable levels vary by industry, business model, seasonality, credit terms, access to finance and cash-flow stability. A retailer with fast cash sales may operate safely with a lower ratio, while a business with uncertain receivables may need a stronger buffer.
ACCA guidance stresses that ratio interpretation should use industry context and that liquidity ratios should be considered alongside operating cash flow.
Why a high ratio may not be good
An unusually high quick ratio can indicate excess cash, weak investment, slow collection of receivables, or underuse of appropriate short-term finance. Liquidity has an opportunity cost: resources held idle may produce little return.
Investigate the quality and productivity of the assets, not only the total.
Why a low ratio may not be disastrous
A low ratio may be manageable when cash sales are predictable, inventory turns rapidly, supplier terms are stable, committed credit facilities are available and operating cash generation is strong. However, these factors should be evidenced, not assumed.
A low ratio combined with overdue payables, negative operating cash flow or rising short-term borrowing is a stronger warning signal.
Quality of trade receivables
Receivables are included in quick assets, but the accounting balance may not equal cash available. Review overdue accounts, expected credit losses, disputed invoices, customer concentration and subsequent collections. A business can report a reasonable quick ratio while much of its receivable balance is slow or impaired.
Timing and seasonality limitations
The ratio is based on a statement-of-financial-position date. A seasonal business can show an unusually high or low result depending on inventory purchases, customer collections and supplier payments around that date. Average monthly balances and cash-flow forecasts often provide a better picture.
Improving liquidity responsibly
- accelerate invoicing and follow up overdue receivables;
- resolve billing disputes quickly;
- negotiate appropriate supplier and customer terms;
- manage inventory without damaging service levels;
- avoid using short-term borrowing to fund permanent long-term needs;
- prepare rolling cash-flow forecasts;
- review unused cash and short-term investment policies.
Analytical checklist
- Confirm which assets are included in the numerator.
- Compare with prior periods, budgets and sector data.
- Review receivable ageing and credit-loss allowances.
- Examine operating cash flow and upcoming payment dates.
- Understand seasonal and one-off movements.
- Assess access to committed finance.
- Use the ratio with working-capital days and cash forecasts.
The broader financial accounting guide explains the statements feeding the ratio, while the statement of financial position article explains the underlying asset and liability classifications.
Quick ratio trend example
Suppose the ratio falls from 1.30:1 to 0.85:1. The decline could come from lower cash, slower receivable collection, increased short-term borrowing or a large supplier balance. The next step is not merely to label liquidity “poor.” Break the movement into components and compare them with sales growth, credit terms, inventory days and operating cash flow.
If the decline follows a planned investment funded by a committed facility, it may be manageable. If it reflects persistent losses and overdue obligations, it may indicate financial stress. The same ratio change can therefore have different meanings.
Using average balances
Year-end balances may be unrepresentative. Analysts can calculate monthly or quarterly quick ratios and compare average receivables and liabilities. This helps identify window dressing, seasonal purchases and payment timing that can distort a single-date measure.
Key takeaway
The quick ratio is a useful stress test of short-term liquidity, but it is only a snapshot. Good analysis examines the formula, asset quality, payment timing, cash generation, industry practice and financing arrangements before drawing a conclusion.
Official learning references: ACCA Ratio Analysis and ACCA Performance Appraisal guidance.