Quick RatioFinancial Dictionary -> Investing -> Quick Ratio
Quick Ratio = (current assets - stock, salaries and supplies) / (current liabilities - bank overdraft)
This is more accurate that the Current Ratio, in that stock is not counted as an asset. There is no guarantee that stock can be sold and if a company is in financial trouble that may be their main problem, so it would be foolish to count stock.
A business should aim for a quick ration of 1:1 or better.
Here is an example of Quick Ratio using a made up balance sheet:
Fixed Assets: $57,000
Current Assets -
Total Current Assets: $48,000
Current Liabilities -
Total Current Assets: $19,000
Working Capital: $29,000
Total Assets: $86,000
Financed by -
Total Capital Employed: $86,000
This business has trade credit of $19,000, a long term Loan of $40,000 and the owners have invested $46,000, meaning the business has a good working capital situation.
(Current assets - stock) / Current liabilities
= $27,000 / $19,000
The quick ratio indicates that the company is well financed and is not relying too heavily on external funding. Its working capital position is very healthy.
This ratio would be of interest to the business itself, so they can look at better financing options for the future and for investors looking at how stable the company is and how close they may be to falling in to debt.