What does the Quick Ratio formula measure?

The Quick Ratio, also known as the acid-test ratio, is a financial metric used to assess a company's short-term liquidity position. It measures the ability of a company to meet its short-term obligations using its most liquid assets. The formula for the Quick Ratio is calculated as:

(Current Assets - Inventory) / Current Liabilities.

By subtracting inventory from current assets, the Quick Ratio focuses on the most liquid assets, such as cash and receivables, that can be quickly converted to cash if needed. This eliminates inventory from the equation since it may not be as readily available for meeting immediate liabilities.

This measurement provides a more stringent view of a company's liquidity than the current ratio, which includes all current assets. A higher Quick Ratio indicates a stronger liquidity position, meaning the company is better equipped to cover its short-term obligations without selling inventory.