Quick ratio (acid test)

Definition

The quick ratio, or acid test, divides liquid assets (cash and money owed to you, but not stock) by current liabilities. Excluding stock makes it a tougher test than the current ratio of whether a business can meet short-term obligations without selling inventory.

Why it matters

A quick ratio around 1 or above suggests the business can cover its short-term debts from readily available assets — a sign of the liquidity that supports affordability. See working capital.

In practice

Picture a UK limited company preparing management accounts before a funding conversation. Its current ratio looks reassuring because stock is sitting in the warehouse, but that stock has not yet been sold, invoiced, or turned into cash. The quick ratio strips that stock out, leaving only cash and amounts already owed by customers set against what is due to suppliers, HMRC and other short-term creditors.

For a director, the exercise is less about the single number and more about the conversation it prompts internally: how quickly could debtors realistically be collected, and how much of the company's apparent liquidity is really tied up in goods that still need to be sold. A business with strong stock turnover may live comfortably with a lower quick ratio than one whose stock moves slowly, because the gap between the two ratios tells its own story about how dependent the company is on sales converting into cash.

How lenders read it

Lenders assessing a limited company tend to look at the quick ratio alongside working capital and cash flow trends rather than in isolation, since a single snapshot can flatter or understate the underlying picture depending on when in the trading cycle it is taken. A company that trades seasonally, for instance, may show a very different quick ratio at different points in its year without anything having genuinely changed about its resilience.

What tends to matter more is direction of travel and consistency with the rest of the accounts: whether debtors are collectable within a reasonable period, whether the figure has been drifting in one direction over successive periods, and whether it sits together with sensible affordability evidence elsewhere in the business. A thin quick ratio is not automatically a red flag if the wider trading picture and cash generation support it.