Quick Ratio (acid test)

Quick Ratio (acid test)

Current Assets (CA) – Stocks

Current Liabilities

 

Benchmark: 0.4

Current assets less stocks divided by current liabilities.

The rationale here is that stocks cannot be quickly converted into cash in order to meet short term debt on demand, and hence they are deducted from current assets.

In theory, a company’s quick ratio should be greater or equal to 1, or it is insolvent. However, a much lower figure is generally accepted today, provided that the company is considered to be financially stable.