# VMC: What Is Quick Ratio?

The post was originally published here.

## Definition of Quick Ratio

• The quick ratio is a liquidity ratio that measures a firm’s ability to pay its short term liabilities with its most liquid assets.
• Unlike the current ratio, the quick ratio is only calculated using the most liquid assets.
• The ideal current ratio is 1:1.
• The higher the ratio, the safer is the firm as that would mean they have excess cash.
• However, if the ratio is too high, the firm has too much cash and should utilize it.

## What is the Formula for the Quick Ratio?

• The quick ratio can be calculated in two methods.
• The first method is by adding Cash & equivalents, Marketable securities, Accounts receivable, and diving them by current liabilities.

Quick ratio = (Cash & equivalents + Marketable securities + Accounts receivable)/ Current liabilities

• The second method is by subtracting inventory and prepaid expenses from current assets and dividing them by current liabilities.

Quick ratio = (Current asset – Inventory – Prepaid expense )/ Current liabilities

## The Quick Ratio in Practice

• Assume that bleu waters has:
• Current assets:
• Cash \$ 30,000
• Account receivable \$20,000
• Marketable security \$20,000
• Prepaid expense \$15,000
• Inventory \$15,000
• Current liabilities:
• Account payable \$50,000
• Term debt \$30,000
• Bleu waters’ quick ratio is:
• (\$ 30,000 + \$20,000 + \$20,000)/(\$50,000 + \$30,000)= 0.875 OR
• (\$100,000 \$15,000 \$15,000)/ (\$50,000 + \$30,000)= 0.875
• The ratio indicates that the firm does not have enough liquid assets (cash) to pay for the current liabilities.

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