Legal Definitions - quick-asset ratio

The quick-asset ratio is a financial ratio that measures a company's ability to pay off its current liabilities using its most liquid assets. It is also known as the quick ratio or acid-test ratio.

The formula for calculating the quick-asset ratio is:

Quick-Asset Ratio = (Current Assets - Inventory) / Current Liabilities

Let's say a company has $100,000 in current assets, $20,000 of which is inventory, and $50,000 in current liabilities. The quick-asset ratio would be:

Quick-Asset Ratio = ($100,000 - $20,000) / $50,000 = 1.6

This means that the company has $1.60 in liquid assets to cover each dollar of current liabilities.

Another example would be a company that has $50,000 in cash and $30,000 in accounts receivable, but $20,000 in inventory and $10,000 in prepaid expenses. Its current liabilities are $40,000. The quick-asset ratio would be:

Quick-Asset Ratio = ($50,000 + $30,000 - $20,000) / $40,000 = 1.25

This means that the company has $1.25 in liquid assets to cover each dollar of current liabilities.

These examples illustrate how the quick-asset ratio measures a company's ability to pay off its current liabilities using its most liquid assets, excluding inventory and prepaid expenses.