GLOSSARY // Fundamentals
Quick Ratio
The quick ratio is the current ratio with inventory thrown out: (current assets - inventory) / current liabilities. Inventory gets excluded because it is the current asset most likely to disappoint — it can take months to sell, or require discounting to move at all.
Analysts call it the acid test. It asks whether a company could pay its near-term bills without selling a single unit of product, using only cash, marketable securities, and receivables. Above 1.0 passes; a company at 0.4 is betting its solvency on inventory moving on schedule.
The gap between the current and quick ratios tells its own story: a current ratio of 2.5 with a quick ratio of 0.6 describes a balance sheet that is mostly warehouse.
A retailer carries $500M in current assets, $150M of it inventory, against $250M in current liabilities. Quick ratio = (500 - 150) / 250 = 1.4 — short-term obligations covered 1.4 times without touching the stockroom. Its current ratio, by contrast, is 500 / 250 = 2.0.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.