**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**