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The liquidity metric that filters out inventory — why that matters, and when it's the better measure to reach for.
The Quick Ratio (also called the Acid-Test ratio) measures a company's ability to cover short-term liabilities using only its most liquid assets — cash, cash equivalents, and receivables — excluding inventory. The formula: (current assets minus inventory) divided by current liabilities.
Inventory is the least liquid current asset — turning it into cash requires an actual sale, which can take time and doesn't always happen at the full price recorded on the books. A regular current ratio (which includes inventory) can paint an overly optimistic picture for a company sitting on a large pile of hard-to-sell inventory.
In companies with relatively large inventory relative to their operations (retail, manufacturing), the gap between the current ratio and quick ratio can be very meaningful — and worth checking. In services or software companies, which carry almost no inventory, the two ratios are usually very similar.
Both the quick ratio and current ratio are checked as part of the Fundamental category (20% of the score) — together with debt-to-equity and interest coverage, for a full picture of short-term liquidity and financial health.
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The information in this guide is intended for general educational purposes only and does not constitute investment advice. Full details on the disclaimer page.