What is Quick Ratio (Acid-Test)?
The quick ratio, also called the acid-test ratio, is a liquidity ratio that measures a company’s ability to meet its short-term obligations using its most liquid assets. It excludes inventory because inventory may take time to convert to cash. A ratio of 1 or more is generally considered healthy.
How It Works
- Sum quick assets: cash, marketable securities, and accounts receivable.
- Divide quick assets by current liabilities.
- Compare the ratio to industry benchmarks and prior periods.
- Investigate the trend if the ratio falls below 1 or shows a worsening pattern.
Saudi Context
Saudi banks supervised by SAMA require minimum liquidity ratios from corporate borrowers, including the quick ratio. Tadawul-listed companies disclose liquidity metrics in their MD&A, and Vision 2030 corporates often maintain strong quick ratios to fund expansion without over-relying on debt.
Example
A Saudi retailer has SAR 8 million cash, SAR 12 million receivables, and SAR 14 million current liabilities. Quick ratio = (8 + 12) / 14 = 1.43, indicating strong short-term liquidity.