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 Ratio = Quick Assets / Current liabilities
  • Quick 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.

Significance and Interpretation

    • Quick Ratio = 1: This implies that the company has the capability to fulfill 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
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