The quick ratio (also known as an “acid test”) is a financial ratio used to measure how well equipped a company is to meet its short-term liquidity needs.

It basically measures how much cash (or assets easily and quickly converted to cash) a company has available to meet its short-term liquidity obligations. Since inventories are assets but are not necessarily liquid, they are excluded from the calculation.

The Quick Ratio can be calculated by subtracting inventories from current assets, and dividing that number by current liabilities. The higher the quick ratio, the better suited a company is to meeting its short-term obligations.

For example, a quick ratio of 2.0 means that a company has $2 of liquid assets available for each $1 owed.