Quick ratio
In one sentenceCurrent assets excluding inventory divided by current liabilities, measuring the ability to pay without waiting to sell the goods.
Simply put
Inventory is the slowest current asset to turn into cash, and it may be sold at a discount if you are forced to. That is why this ratio excludes it and keeps cash, receivables and similar items.
If the current ratio is good and the quick ratio is weak, a large part of your short-term assets is tied up in inventory.
Worked example
An auto parts store has current assets of 800,000 SAR, of which inventory is 350,000 SAR, and current liabilities of 500,000 SAR.
Current assets − inventory = 800,000 − 350,000450,000 SAR
Current liabilities500,000 SAR
Quick ratio = 450,000 ÷ 500,0000.9 times
Formula: (Current assets − inventory) ÷ current liabilities
Don't confuse it with
Current ratioThe current ratio includes inventory in the numerator, so it is always greater than or equal to the quick ratio.