# Quick Ratio

Quick Ratio is a type of Liquidity Ratio that determines a company’s capacity to meet its short-term liabilities/debts with quick/most liquid assets. It is a measure of the extent to which quick assets cover the current liability of the company. This ratio is also known as the Acid Test Ratio or Quick Ratio.
$$Quick\quad Ratio=\frac { Quick\quad Assets }{ Current\quad liabilities }$$
• Significance and InterpretationQuick Assets are those assets that can be converted quickly into cash, the quick asset is also known as Liquid Assets. For example, inventories form a part of Current Assets but not of Quick Assets as they are not immediately convertible into cash.
• Current Liabilities are the liabilities or debts that are due for payment within a year.
• Quick Ratio = 1: This implies that the company has the capability to fulfil its immediate debt/liabilities by using Quick Assets itself i.e. immediate liabilities can be fulfilled nearly with cash.
• Quick Ratio < 1: This implies that the company cannot meet its immediate debt/liabilities with Quick Assets, it may need some other assets as well.
• Quick Ratio > 1: This implies that the company has enough Quick Assets, even more than the outstanding immediate liabilities.
• The ideal Quick Ratio is 1, a value higher than this is undesirable as it implies that funds of the company are unutilized.
• Quick Ratio does not include non-liquid current assets hence it is considered a better measure of liquidity than the Current Ratio. However, it must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.
• Quick Ratio = Quick Assets / Current Liability
• Current Ratio = Current Asset / Current Liability
• Quick Ratio / Current Ratio = Quick Asset / Current Asset
• A ratio of Quick Ratio to Current Ratio gives details of how much of the Current Asset is Liquid Asset. (shown above)

### Examples

#### Example 1:

M/S ABC Ltd. has Quick Assets worth ₹ 520 Cr and Current Liabilities of ₹ 500 Cr. Calculate the Quick Ratio for the company

#### Solution:

Quick Assets = ₹520 Cr and Current Liability = ₹500 Cr
Quick Ratio = Quick Assets / Current Liability
520 / 500
⇨ 26/25
Hence, Quick Ratio = 26/25 or 1.04

#### Example 2:

The following information is available about M/S XYZ Ltd, find the quick ratio of the firm.
Sr. No Particulars Amount (in ₹ Cr)
1 Accounts Receivable 400.00
2 Bills Payable 250.00
3 Inventories 125.00
4 Cash Balance 50.00
5 Tax Payable 150.00
6 Bank Borrowing (Short Term) 25.00

#### Solution:

Quick Assets = Accounts Receivable + Cash Balance (Inventories are not included in Quick Assets)
(400+50)
450 Cr
Current Liabilities = Bills Payable + Tax Payable + Bank Borrowing
(250 + 150 + 25)
425 Cr
Quick Ratio = Quick Assets / Current Liability
450 / 425
1.06

#### Example 3:

Current Ratio and Quick Ratio of M/S Zebra Ltd. is 1.8 and 0.95 respectively. Find the ratio between Quick Asset and Current Asset.

#### Solution:

Quick Assets / Current Assets = Quick Ratio / Current Ration
0.95/1.8
0.528
Hence, Quick Assets / Current Assets = 0.528

#### About me My name is Ramandeep Singh. I authored the Quantitative Aptitude Made Easy book. I have been providing online courses and free study material for RBI Grade B, NABARD Grade A, SEBI Grade A and Specialist Officer exams since 2013.

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