What is the difference between the quick ratio and the current ratio?

Stock. The current ratio divides all current assets by current liabilities; the quick ratio removes stock first, and often prepayments too, so it counts only assets that can become cash without a sale. A business with a current ratio well above its quick ratio holds much of its liquidity on the shelves. The difference between the two is the part of its short-term cover that depends on stock selling at the value in the accounts.

Is a quick ratio below 1 bad?

Not by itself. A business that holds stock and finances it with short-term trade loans will often show a quick ratio below 1.0 times, because the loans are current liabilities and the stock that repays them is excluded. A service business with little stock and a quick ratio below 1.0 times is a different case, since its current assets are mostly receivables already. A lender reads the level against the business model, the trend and the quality of the receivables.

What counts as a quick asset?

Cash, deposits that can be withdrawn at short notice, short-term investments that can be sold readily, and trade receivables net of any provision for bad debts. Stock and prepaid expenses are excluded. Items such as amounts owed by directors, related companies or customers' retentions sit in current assets but are not usually treated as quick by a lender, because their timing is not in the business's control.

What is the difference between the quick ratio and the cash ratio?

The cash ratio is stricter still: it counts only cash and near-cash investments against current liabilities and leaves receivables out as well. It answers whether the business could pay its short-term debts with what it holds today. For most trading businesses the answer is no, by design, because they fund themselves with an overdraft and collect from customers continuously, so lenders tend to read the quick ratio and the cash forecast rather than the cash ratio.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Quick Ratio (Acid Test): a Worked Example

Take away the stock, and see who still gets paid.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

The quick ratio asks whether a business could pay the debts due in the next year if it sold nothing more from its shelves. It counts cash, collectable receivables and similar liquid assets against current liabilities, and leaves stock out. A lender uses it to see how much of the current ratio's comfort rests on stock being sold at book value. A power tool importer with a current ratio of 1.80 times has a quick ratio of 0.80 times at most, and 0.60 times once a director's loan and prepaid deposits are set aside: more than half its apparent liquidity is in its warehouse.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

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PART OF Credit Analysis for Beginners

// 01 — WHY A LENDER TAKES THE STOCK OUT

Stock is the least certain current asset. It has to be sold before it can be collected, the sale price is not known until it happens, and in a hurry it fetches less. Receivables are a step closer to cash: the sale has been made and a customer has agreed to pay. Cash is cash. The quick ratio follows that order and stops before stock, so that a business carrying a warehouse full of goods is not credited with liquidity it can only reach by trading.

The adjustment matters most where stock is slow, seasonal or specialised: a parts distributor with thousands of lines, a winery, a maker of goods built to one customer's specification. It matters least where stock turns in days, such as a food wholesaler. The same quick ratio can therefore mean different things in two businesses, and a lender reads it beside how fast the stock actually moves.

// 02 — TWO WAYS TO BUILD IT, AND WHY THEY DIFFER

Subtraction: (current assets − stock) ÷ current liabilities

often also less prepayments

Build-up: (cash + short-term investments + trade receivables)

÷ current liabilities

Many explanations treat the two as interchangeable, and on a clean balance sheet they give the same answer. On a mid-market borrower's balance sheet they rarely are, because current assets hold items that are neither stock nor quick. A debit balance on a director's or shareholder's current account sits in current assets in many owner-managed businesses, though it may be repaid only when the owner chooses. Deposits paid to overseas suppliers, retentions held by customers, related-party loans and tax refunds due can also sit there. The subtraction method keeps all of them; the build-up method keeps only what is named. Many lenders build the ratio up from the items it would rely on, and notes what it left out.

// 03 — THE EXAMPLE

An importer and wholesaler of power tools, constructed for this page like every figure in it, closes its year with current assets of US$9.0m: US$0.3m of cash, US$2.7m of trade debtors net of provision, US$0.6m owed by a director, US$0.4m of prepayments and supplier deposits, and US$5.0m of stock. Current liabilities are US$5.0m, of which US$1.9m is drawn on an import trade finance line that funded stock now in the warehouse.

Current ratio: 9.0 ÷ 5.0 = 1.80×

Quick, stock out: (9.0 − 5.0) ÷ 5.0 = 0.80×

Quick, stock and prepayments out: (9.0 − 5.0 − 0.4) ÷ 5.0 = 0.72×

Quick, built up: (0.3 + 2.7) ÷ 5.0 = 0.60×

Cash ratio: 0.3 ÷ 5.0 = 0.06×

Trade loans paired with the stock they financed:

3.0 ÷ (5.0 − 1.9) = 3.0 ÷ 3.1 = 0.97×

The current ratio says the importer has 1.80 dollars coming for every dollar it owes. The quick ratio says that without selling stock it has between 60 and 80 cents, depending on whether the director's loan is counted. That gap is the measure of dependence on the warehouse, and it is large. The last line is one way a lender reads a stockholding business: the trade finance line will be repaid from the sale of the goods it paid for, so the question becomes whether the remaining debts are covered by debtors and cash. On that reading the importer is close to covered, provided the stock sells at the price the trade line assumed. These levels belong to the example, not to a market norm.

// 04 — HOW IT DIFFERS FROM THE RATIOS BESIDE IT

The current ratio counts every current asset, stock included; the quick ratio counts only those that do not need a sale; the cash ratio counts cash and near-cash alone, and for most trading businesses is a small number that says little, since they hold an overdraft rather than a cash pile. Read together, the three show where the liquidity sits: in the bank, in customers' hands, or on the shelves.

None of them says how long the stock takes to sell or the debtors to pay. That is what inventory days and debtor days add, and why a lender reads the quick ratio as a question rather than an answer. A falling quick ratio with rising stock days points to slow-moving stock being bought ahead of demand; a falling quick ratio with rising debtor days points to collections.

DEFINED IN ONE PARAGRAPH → · THE CURRENT RATIO, WORKED → · SLOW-MOVING STOCK →

// 05 — WHERE IT DECIDES A FILE

The quick ratio shapes how a lender structures a working capital facility more than whether it lends. A business with a strong quick ratio has its liquidity in receivables, which an overdraft or an invoice finance line can be sized against. A business with a weak quick ratio and a strong current ratio has its liquidity in stock, and a lender wants to know what that stock would fetch, how fast it turns and whether a supplier's retention of title clause would take some of it back. That is where a stock valuation, a field exam or a trade finance line tied to each shipment comes in.

The receivables inside the ratio are tested too. A lender lending against them under asset-based lending removes debts that are old, disputed, owed by related companies or concentrated in one customer before counting any, which is the build-up method carried one step further. A quick ratio built on receivables that would not survive that test overstates liquidity in the same way the current ratio does with stock.

HOW BANKS ASSESS A WORKING CAPITAL REQUEST → · SHAREHOLDER CURRENT ACCOUNT →

// QUESTIONS PEOPLE ASK

What is the difference between the quick ratio and the current ratio?: Stock. The current ratio divides all current assets by current liabilities; the quick ratio removes stock first, and often prepayments too, so it counts only assets that can become cash without a sale. A business with a current ratio well above its quick ratio holds much of its liquidity on the shelves. The difference between the two is the part of its short-term cover that depends on stock selling at the value in the accounts.
Is a quick ratio below 1 bad?: Not by itself. A business that holds stock and finances it with short-term trade loans will often show a quick ratio below 1.0 times, because the loans are current liabilities and the stock that repays them is excluded. A service business with little stock and a quick ratio below 1.0 times is a different case, since its current assets are mostly receivables already. A lender reads the level against the business model, the trend and the quality of the receivables.
What counts as a quick asset?: Cash, deposits that can be withdrawn at short notice, short-term investments that can be sold readily, and trade receivables net of any provision for bad debts. Stock and prepaid expenses are excluded. Items such as amounts owed by directors, related companies or customers' retentions sit in current assets but are not usually treated as quick by a lender, because their timing is not in the business's control.
What is the difference between the quick ratio and the cash ratio?: The cash ratio is stricter still: it counts only cash and near-cash investments against current liabilities and leaves receivables out as well. It answers whether the business could pay its short-term debts with what it holds today. For most trading businesses the answer is no, by design, because they fund themselves with an overdraft and collect from customers continuously, so lenders tend to read the quick ratio and the cash forecast rather than the cash ratio.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · CAPACITY

Two borrowers each carry debt of three times EBITDA. One sells software on three-year contracts; the other builds new houses for sale.

Is three times the same risk for both?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHQuick ratio (acid test) What is the quick ratio, and why do lenders take stock out of it?