What is the quick ratio?
The quick ratio measures a company’s ability to meet short term obligations using its most liquid assets, excluding inventory.
Why is the quick ratio important?
It provides a stricter measure of liquidity than the current ratio by focusing only on assets which can be quickly converted into cash.
How is the quick ratio calculated?
It is calculated by subtracting inventory from current assets and dividing the result by current liabilities.
What is considered a good quick ratio?
A ratio above 1 suggests that a business can meet its short term obligations without relying on inventory sales.
What are limitations of the quick ratio?
It does not consider timing of cash flows or access to credit, which can also affect liquidity.