**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**