Quick Ratio Definition & Meaning | Fundamental Analysis | CSIMarket
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Glossary

Quick Ratio

Fundamental Analysis

The Quick Ratio, also known as the Acid Test Ratio, is a financial ratio used in fundamental analysis to measure a company*s ability to meet its short-term obligations using its most liquid assets. It is a more conservative version of the current ratio, which includes all current assets, including inventory.

The Quick Ratio formula is as follows:

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

A Quick Ratio higher than 1 indicates that a company has enough liquid assets to cover its short-term liabilities, while a ratio lower than 1 indicates a potential liquidity problem. A Quick Ratio of 1 suggests the company will be able to meet its short-term obligations but will have little room for error.

Fundamental analysts use the Quick Ratio to assess a company*s financial health and its ability to manage short-term liquidity crises. It is also used to compare companies within the same industry, as some industries require higher or lower levels of liquidity. For example, a retail company may have a higher Inventory turnover ratio than a software company, which could result in a lower Quick Ratio due to higher inventory levels.




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