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