Legal Definitions - quick ratio

The quick ratio, also known as the quick-asset ratio or acid-test ratio, is a financial ratio that measures a company's ability to pay off its current liabilities with its most liquid assets. These assets include cash, marketable securities, and accounts receivable.

Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

Let's say Company A has $100,000 in current assets, $20,000 in inventory, and $5,000 in prepaid expenses. Its current liabilities are $50,000. To calculate the quick ratio, we would subtract the inventory and prepaid expenses from the current assets:

Quick Ratio = ($100,000 - $20,000 - $5,000) / $50,000 = 1.5

This means that Company A has $1.50 in liquid assets for every $1 of current liabilities. A quick ratio of 1 or higher is generally considered good, as it indicates that the company can meet its short-term obligations without having to sell off its inventory or other assets.