How is the quick ratio calculated?

The quick ratio, also known as the acid-test ratio, is a financial metric used to assess a company’s short-term liquidity position. It specifically measures the ability of a company to meet its short-term obligations using its most liquid assets.

The calculation for the quick ratio focuses on quick assets, which typically include cash, cash equivalents, and accounts receivable—assets that can be quickly converted to cash. This is in contrast to current assets, which may also include inventory and other less liquid assets.

By dividing quick assets by current liabilities, the quick ratio provides insight into whether the company can cover its immediate liabilities without relying on the sale of inventory, which may not be as liquid. This ratio is particularly useful for assessing financial health in industries where inventory is not easily converted to cash.

This understanding of the quick ratio and its calculation method is essential for assessing a company's liquidity and financial stability in a concise way.