The quick ratio — also called the acid-test ratio — measures a company's ability to meet its short-term liabilities using only its most liquid assets. It is calculated by subtracting stock (inventory) from current assets, then dividing by current liabilities.
Quick ratio = (current assets − stock) ÷ current liabilities
Why strip out stock
Stock is a current asset, but it is not immediately liquid — it must first be sold and the proceeds collected before it becomes cash. In a stressed scenario, selling stock quickly often requires price discounting. The quick ratio therefore gives a more conservative and often more realistic measure of short-term liquidity than the current ratio, particularly for businesses that carry significant inventory.
Interpreting the quick ratio
- A quick ratio of 1.0 or above generally indicates the company can cover its current liabilities from liquid assets alone.
- A ratio below 1.0 is not automatically a problem — businesses with fast stock turnover or very reliable credit lines may operate comfortably below 1.0 — but it warrants scrutiny.
- Industry context matters: a software company carrying no stock can have a very different ratio profile from a distributor.
Using both ratios together
Reviewing the current ratio and quick ratio side by side is informative. A large gap between the two suggests the company carries heavy stock relative to its liquid assets. A small gap suggests most current assets are already liquid — cash, debtors, short-term investments.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What does current ratio mean for my company?, What are retained earnings on a company balance sheet?.