Financial ratio analysis - liquidity ratios.
(Current assets less Inventories) / Current liabilities.
The quick ratio gives a very rough indication of the liquidity (or solvency) of the reporting entity.
If the quick ratio were to fall below 1.0, this would indicate that the entity would not be able to meet its current liabilities out of its cash in hand and the proceeds of its other current assets (excluding inventories).
Current assets (excluding inventories) = £3m.
Current liabilities = £4m.
The Quick ratio is:
= 3 / 4
The quick ratio is also known as the Acid test or the Acid test ratio.
Inventories are sometimes also known as Stock.