Primary Implication

Allow your Current Liabilities to exceed your quick “cash” assets; you have allowed cash outflows to overtake cash inflows.  When this happens, be ready for angry calls from those you owe money aggressively asking when you will pay them.

Overview

A Quick Ratio, also called the Acid Test, is a Liquidity Ratio that quantifies whether there are enough current assets to cover current liabilities.  This ratio indicates a company’s capacity to maintain operations as usual with current cash or near-cash reserves in slow periods.

The Quick Ratio establishes how quickly a company can convert its “quick assets” (cash, cash equivalents, short-term investments, marketable securities) into cash to pay off its current liabilities within 90-days.

If a company has enough quick assets to cover its total current liabilities, the firm will be able to pay off its obligations without having to sell off any long-term or capital assets.  This is the “acid test” for a company, signifying the degree a company’s current liabilities are covered by the most liquid of its assets.

The formula for calculating the Quick Ratio or Acid Test is as follows:

(Cash + Cash Equivalents + Short-Term Investments + Current Receivables) / Current Liabilities

A Quick Ratio of 1 indicates that quick assets equal current liabilities.  This means that the company could pay off its current liabilities without selling any long-term assets.  A Quick Ratio of 2 shows that the company has twice as many quick assets than current liabilities.

Above 1:  shows that there are more quick assets than current liabilities.

Less than 1:  shows that there are more current liabilities than quick assets.