Quick Ratio: Can a Company Pay Its Bills Without Selling Inventory?

Every results season, the headline numbers grab the attention: revenue growth, EBITDA margin, profit after tax. The quick ratio gets almost none of it, which is a pity, because it answers a blunt question that profit numbers do not. If the company’s suppliers, lenders and tax authorities all asked to be paid over the next few months, could it pay them from cash and near-cash alone, without having to dump its stock in a fire sale?

That is the whole idea. It is an old ratio, and a simple one, and it is especially useful right now. September-quarter results are the half-yearly results, and that is when Indian listed companies have to put a balance sheet in front of shareholders. In this guide we walk through the formula, the line items you pull from an Indian results filing, three worked examples, and the traps that make a “good” number misleading.

What the quick ratio measures

The quick ratio, also called the acid-test ratio, compares a company’s quick assets with its current liabilities. Quick assets are the near-cash items: cash, cash equivalents, marketable securities and receivables. Wikipedia’s entry on the quick ratio describes it as a more conservative cousin of the current ratio, because it leaves out inventory, which it does not treat as liquid enough.

The formula is short:

Quick ratio = Quick assets ÷ Current liabilities

There are two common ways to arrive at quick assets, and Investopedia’s explainer lists both:

• Build it up: cash + cash equivalents + marketable securities + net receivables.
• Strip it down: total current assets − inventory − prepaid expenses.

The two routes will not always give the same answer, because a balance sheet carries other current items (short-term loans and advances, other current assets) that the build-up method leaves out and the strip-down method keeps. That difference matters more than people think, and we come back to it below.

The denominator is the easy part. Both methods use all current liabilities. Investopedia points out that the ratio does not try to separate a payable due next week from one due in eleven months; it treats everything in current liabilities, which are obligations due within a year, as if it were near-term.

Why inventory and prepaid expenses are left out

Inventory is an asset, but turning it into cash usually means selling it, and selling it in a hurry often means selling it cheap. Prepaid expenses are even less useful in a squeeze: rent or insurance paid in advance cannot be handed to a supplier as payment. Investopedia makes both points, noting that prepaid expenses may not be refundable and that inventory may be hard to convert without steep discounts.

So the quick ratio asks a harsher question than the current ratio. The current ratio says, “add up everything that should turn into cash within a year.” The quick ratio says, “now remove the stuff you would have to sell or cannot spend.”

The gap between a company’s current ratio and its quick ratio is a rough measure of how much of its short-term safety cushion is sitting in godowns.

Where to find the numbers in Indian results

Quarterly results in India mostly carry the profit and loss statement. The balance sheet shows up twice a year. Under Regulation 33(3)(f) of SEBI’s listing regulations, the half-yearly financial results must include a statement of assets and liabilities as at the end of the half year, along with cash flows for the half year. SEBI confirmed this in its FAQs on the LODR Regulations. In practice that means the September results and the March (annual) results are when you can compute a fresh quick ratio from exchange filings.

The layout of that statement is drawn from Schedule III of the Companies Act, 2013. In SEBI’s circular CIR/CFD/CMD/15/2015 of November 30, 2015, the format (Annexure IX) lists these items under current assets:

• Current investments
• Inventories
• Trade receivables
• Cash and cash equivalents
• Short-term loans and advances
• Other current assets

And under current liabilities: short-term borrowings, trade payables, other current liabilities and short-term provisions.

Mapping that to the formula is straightforward. For the build-up method, take cash and cash equivalents, add current investments (the marketable securities bucket, if they are genuinely liquid funds or deposits), and add trade receivables. For the strip-down method, take the sub-total of current assets and subtract inventories and any prepaid expenses you can find in the notes.

One caution on scope. The SEBI annexure is titled for companies other than banks, and lenders report in a different layout. The quick ratio is a tool for manufacturers, traders, service firms and the like. Do not try to run it on a bank’s balance sheet.

Worked example 1: a distributor with full godowns

Illustration only: the company and every figure below are made up to show the arithmetic.

Take a fictional consumer-goods distributor, call it Sahyadri Traders, with this half-year balance sheet (₹ crore):

Current ratio = 440 ÷ 320 = 1.375. Looks comfortable.

Quick ratio, build-up method = (40 + 20 + 110) ÷ 320 = 170 ÷ 320 = about 0.53.

Quick ratio, strip-down method = (440 − 230 − 10) ÷ 320 = 200 ÷ 320 = 0.625.

Same company, same day, and the answer is either 0.53 or 0.63 depending on whether you count the loans, advances and other current assets as quick. Either way it is well below 1. More than half of Sahyadri’s current assets are stock. If sales slowed and suppliers tightened credit at the same time, it would have to move that stock quickly, and probably at a discount.

Is that automatically bad? Not necessarily. A distributor is supposed to hold stock. But it tells you where to look next: inventory days, how fast stock is turning, and whether short-term borrowings are funding it. Our guide to the cash conversion cycle covers that follow-up.

Worked example 2: a services company with almost no stock

Illustration only: fictional company, made-up figures.

Now a fictional IT services firm, Konkan Softech (₹ crore):

Current ratio = 330 ÷ 150 = 2.2.

Quick ratio, build-up = (90 + 60 + 150) ÷ 150 = 300 ÷ 150 = 2.0.

Quick ratio, strip-down = (330 − 0 − 8) ÷ 150 = 322 ÷ 150 = about 2.15.

With no inventory, the current ratio and quick ratio sit close together. That is the normal pattern for asset-light businesses. Comparing Konkan’s 2.0 with Sahyadri’s 0.53 and concluding that the software firm is “four times safer” would be a mistake, because the two business models are built differently. Both Investopedia and Wikipedia note that what counts as a healthy quick ratio varies by industry. A quick ratio of 1 or more is the usual rule of thumb, but compare a company with its own history and with close peers, not with a different sector.

Worked example 3: when a healthy ratio hides a problem

Illustration only: made-up figures.

Suppose a fictional engineering contractor, Malwa Infra, reports quick assets of ₹300 crore and current liabilities of ₹250 crore. Quick ratio: 300 ÷ 250 = 1.2. Above 1, so job done?

Now open the notes. Of the ₹300 crore, ₹220 crore is trade receivables, and a large chunk of that is money owed by customers who have taken well over a year to pay. Meanwhile ₹150 crore of the liabilities are trade payables due within 60 days.

This is precisely the trap Wikipedia’s entry describes: a business with large receivables collected only after a long wait, and payables due right away, can show a healthy quick ratio while it is close to running out of cash. The opposite also happens. A company that collects fast and pays its suppliers slowly can show a low quick ratio and still be in fine shape.

Investopedia adds a related point: receivables should be counted net of the amount the company does not expect to collect. If Malwa had to provide for, say, ₹80 crore of doubtful dues (again, an illustrative number), quick assets would fall to ₹220 crore and the ratio to 220 ÷ 250 = 0.88. The headline number moved below 1 just by being honest about collections.

A quick ratio is only as quick as the receivables inside it. A rupee owed by a customer who pays in 30 days and a rupee stuck for two years look identical on the balance sheet.

How we read the quick ratio in practice

Here is the checklist we use when a half-yearly balance sheet lands on the exchange.

1. Compute both ways. If the build-up and strip-down numbers are far apart, find out what is sitting in “short-term loans and advances” and “other current assets.” Loans to related parties parked there are not cash you can rely on.
2. Check the current investments. Investopedia suggests counting only what can actually be realised within 90 days under normal terms. A liquid fund qualifies easily. Something with a lock-in or an early-exit penalty is less quick than it looks.
3. Look at the trend, not one print. A quick ratio that slides from 1.4 to 1.1 to 0.8 over three half-years tells you more than any single reading. (Those three numbers are illustrative.)
4. Look at what is inside current liabilities. Short-term borrowings that roll over every year are a different risk from trade payables to suppliers. The ratio itself treats them the same.
5. Pair it with coverage and cash flow. Liquidity is not solvency. A company can have a decent quick ratio and still struggle to service its debt, which is where the interest coverage ratio comes in. The half-yearly cash flow statement, which SEBI’s rules require alongside the balance sheet, shows whether operating cash is actually coming in.

Quick ratio vs current ratio: a side-by-side

Run both. If the current ratio is fine but the quick ratio is weak, the business depends on selling its stock to stay liquid. If both are weak, short-term funding is doing a lot of the work, and the next refinancing matters.

Common mistakes

• Using the wrong balance sheet. Standalone and consolidated statements can tell different stories, especially for groups with cash-rich or cash-hungry subsidiaries. Be clear which one you are using, and use the same one each time.
• Comparing across sectors. A retailer’s quick ratio and a software firm’s quick ratio are not competing on the same field.
• Treating 1.0 as a pass mark. It is a rule of thumb, nothing more. A ratio just above 1 built on doubtful receivables is weaker than a ratio of 0.8 backed by cash and fast-paying customers.
• Running it on lenders. As noted above, banks report in a different format. Use lender-specific measures there.
• Reading it in isolation. It is one lens. Our broader guide on how to analyse quarterly results of a company shows where it fits alongside margins, cash flow and debt.

The bottom line

The quick ratio is a five-minute calculation that tells you how much of a company’s short-term safety net is real money. With September results now arriving, every listed company you follow will put out a fresh statement of assets and liabilities. Pull out cash, current investments and trade receivables, divide by current liabilities, and compare the number with last year’s and with a couple of close peers. Then read the receivables note. That last step is where most of the useful information is.

Disclaimer: This article is for education and information only and is not investment advice or a recommendation to buy or sell any security. The companies and figures in the worked examples are fictional illustrations. Please do your own research or consult a SEBI-registered investment adviser before making investment decisions.