Quick Ratio

A quick ratio is a measure of a company's short-term liquidity. It is also known as the “acid-test ratio”, as it looks at a company's assets and liabilities in a more accurate way to determine the company's overall liquidity, debt-paying ability, and solvency. It excludes inventories from the equation because they’re usually the least liquid assets and not necessarily converted into cash quickly.

A quick ratio is an important metric to measure an organization's ability to meet short-term financial obligations. This metric takes a look at the organization's most liquid assets compared to its short-term liabilities. Essentially, this ratio seeks to measure the organization's ability to pay off its short-term debt without the help of its inventories. Therefore, this ratio aims to measure the financial strength of an organization.

The quick ratio may also be known as the “acid-test ratio”, as it is a more accurate measure of short-term liquidity than the current ratio, which includes inventories in its calculation. This is an important metric to look at when analyzing a company, as it gives you a better idea of the real financial position of a company.

In general, a quick ratio of 1 or more is considered healthy. A quick ratio that’s lower than 1 could indicate that the company may not be able to pay off its short-term debt.

A company has a current ratio of 2.5, while its quick ratio is only 1.2. This may indicate that the company has a large inventory, which makes it difficult for the company to pay off short-term debt. It would be wise to look closely at the company's inventory levels to see if there is a way to reduce it to bring the quick ratio to a more acceptable level.