What is the definition of Quick Ratio?

The quick ratio is a conservative indicator of the short-term liquidity of a firm. A higher quick ratio means the company is in a better position to pay off any short-term liabilities.

The calculation for the quick ratio is:

• ( Current Assets - Inventories ) / Current Liabilities

The quick ratio is only used for calculating short-term liabilities, and therefore only Current Assets are considered. The reason Inventory is excluded is that sometimes it can be hard to convert into cash, and therefore not suitable for meeting short-term obligations.