More of this Feature • Lesson 3 Main • How to Get Copies • What is it? • Typical Balance Sheet • Current Assets • Receivables • Receivable Turns • Inventory • Inventory Turns • Inventory Example • Prepaid Expenses • Current Liabilities • Working Capital • WC Per Dollar of Sales • Negative Work. Cap • Current Ratio • Quick Ratio • Long Term Investment • Property, Plant, Equip. • Intangible Assets • Goodwill • Deferred Charges • Debt, Debt to Equity • Other Liabilities • Minority Interest • Shareholder Equity • Book Value • Com. & Pref. Shares • Cap. Surplus, Reserve • Treasury Stock • Retained Earnings • Formula & Calculations • Putting it all Together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

Quick Test Ratio

The Quick Test Ratio (also called the Acid Test or Liquidity Ratio) is the most excessive and difficult test of a company's financial strength and liquidity.  To calculate the quick ratio, take the current assets and subtract the inventory (current assets minus inventory is often referred to as the "quick assets").  What you are left with are the items that can be converted into cash immediately .  Divide the result by the current liabilities.  The answer is the Quick Test ratio.

What does this tell you?  It is a reflection of the liquidity of a business.  The Quick Test ratio does not apply to the  handful of companies where inventory is almost immediately convertible into cash (such as McDonalds, Wal-Mart, etc.) Instead, it measures the ability of the average company to come up with cold, hard cash literally in a matter of hours or days.  Since inventory is rarely sold that fast in most businesses, it is excluded.

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