How is the quick ratio calculated?

The quick ratio is a financial metric used to assess a company's short-term liquidity position and its ability to meet its short-term obligations without relying significantly on the sale of inventory. It is calculated by taking current assets, subtracting inventories (which may not be as easily liquidated), and then dividing that amount by current liabilities. This formula provides a more stringent view of a company’s liquidity than the current ratio, as it focuses only on the most liquid assets.

In this context, current assets minus inventory ensures that only those assets that can quickly be converted to cash are considered, making this method effective for evaluating a company's short-term financial health. If a company's quick ratio is greater than 1, it typically indicates good liquidity, suggesting it has enough liquid assets to cover its current liabilities.