The quick ratio, often referred to as the acid-test ratio, stands as a critical metric in assessing a company's short-term liquidity position. This financial ratio measures a company's ability to meet its short-term obligations with its most liquid assets, providing insights into its financial health without relying on inventory, which is less liquid.
The formula for calculating quick ratio is:
Quick Ratio = Quick Assets / Current Liabilities
Where quick assets is the sum of:
Quick Assets = Cash and cash equivalents + Marketable securities + Accounts receivable
Comparing this ratio with others, such as the current ratio, which includes all current assets in its calculation, the quick ratio offers a more strict view by excluding inventory, underlining the ability to cover liabilities imminently due without selling or converting inventory into cash.
The average quick ratio varies significantly by industry. Here is a table showing the average quick ratio by industries in the US as of May 2024:
| Industry | Average quick ratio | Number of companies |
|---|---|---|
| Advertising Agencies | 1.4 | 22 |
| Aerospace & Defense | 1.22 | 49 |
| Agricultural Inputs | 1.1 | 11 |
| Airlines | 0.58 | 13 |
| Apparel Manufacturing | 0.94 | 17 |
| Apparel Retail | 0.73 | 28 |
| Asset Management | 2.32 | 72 |
| Auto Manufacturers | 0.8 | 15 |
| Auto Parts | 0.88 | 46 |
| Auto & Truck Dealerships | 0.41 | 14 |
| Beverages - Non-Alcoholic | 0.83 | 9 |
| Beverages - Wineries & Distilleries | 0.61 | 9 |
| Biotechnology | 4.55 | 504 |
| Broadcasting | 1.55 | 16 |
| Building Materials | 2.09 | 7 |
| Building Products & Equipment | 1.38 | 29 |
| Business Equipment & Supplies | 0.8 | 7 |
| Capital Markets | 1.54 | 33 |
| Chemicals | 1.39 | 17 |
| Communication Equipment | 1.21 | 51 |
| Computer Hardware | 1.6 | 29 |
| Conglomerates | 0.86 | 12 |
| Consulting Services | 1.23 | 16 |
| Consumer Electronics | 1.12 | 12 |
| Credit Services | 1.25 | 44 |
| Department Stores | 0.54 | 5 |
| Diagnostics & Research | 2.75 | 67 |
| Discount Stores | 0.3 | 9 |
| Drug Manufacturers - General | 0.77 | 12 |
| Drug Manufacturers - Specialty & Generic | 1.95 | 48 |
| Education & Training Services | 1.37 | 16 |
| Electrical Equipment & Parts | 1.25 | 42 |
| Electronic Components | 1.76 | 30 |
| Electronic Gaming & Multimedia | 2.47 | 7 |
| Electronics & Computer Distribution | 1.3 | 6 |
| Engineering & Construction | 1.16 | 30 |
| Entertainment | 0.88 | 37 |
| Farm & Heavy Construction Machinery | 1 | 22 |
| Farm Products | 0.83 | 18 |
| Financial Data & Stock Exchanges | 1.07 | 10 |
| Food Distribution | 0.71 | 9 |
| Footwear & Accessories | 1.11 | 11 |
| Furnishings, Fixtures & Appliances | 0.88 | 19 |
| Gambling | 1.4 | 10 |
| Gold | 1.31 | 27 |
| Grocery Stores | 0.58 | 10 |
| Healthcare Plans | 1.03 | 12 |
| Health Information Services | 2.75 | 32 |
| Home Improvement Retail | 0.58 | 7 |
| Household & Personal Products | 1.05 | 24 |
| Industrial Distribution | 1.26 | 17 |
| Information Technology Services | 1.43 | 53 |
| Insurance Brokers | 1 | 12 |
| Integrated Freight & Logistics | 1.17 | 15 |
| Internet Content & Information | 1.75 | 36 |
| Internet Retail | 1.15 | 22 |
| Leisure | 0.9 | 23 |
| Lodging | 0.52 | 9 |
| Marine Shipping | 1.29 | 23 |
| Medical Care Facilities | 1.76 | 39 |
| Medical Devices | 3.44 | 102 |
| Medical Distribution | 0.72 | 7 |
| Medical Instruments & Supplies | 2.77 | 45 |
| Metal Fabrication | 1.1 | 13 |
| Oil & Gas Drilling | 1.48 | 6 |
| Oil & Gas E&P | 0.9 | 65 |
| Oil & Gas Equipment & Services | 1.37 | 43 |
| Oil & Gas Integrated | 0.78 | 6 |
| Oil & Gas Midstream | 0.81 | 37 |
| Oil & Gas Refining & Marketing | 0.92 | 18 |
| Other Industrial Metals & Mining | 1.29 | 15 |
| Other Precious Metals & Mining | 1.64 | 12 |
| Packaged Foods | 0.88 | 42 |
| Packaging & Containers | 0.86 | 22 |
| Paper & Paper Products | 1.16 | 5 |
| Personal Services | 0.75 | 10 |
| Pharmaceutical Retailers | 0.98 | 8 |
| Pollution & Treatment Controls | 1.88 | 7 |
| Publishing | 0.64 | 7 |
| Railroads | 0.63 | 8 |
| Real Estate Services | 1.11 | 24 |
| Recreational Vehicles | 0.84 | 14 |
| REIT - Specialty | 0.94 | 15 |
| Rental & Leasing Services | 0.65 | 19 |
| Resorts & Casinos | 1.07 | 18 |
| Restaurants | 0.73 | 41 |
| Scientific & Technical Instruments | 1.62 | 24 |
| Security & Protection Services | 1.09 | 14 |
| Semiconductor Equipment & Materials | 2.47 | 26 |
| Semiconductors | 1.99 | 64 |
| Software - Application | 1.64 | 192 |
| Software - Infrastructure | 1.47 | 89 |
| Solar | 1.64 | 13 |
| Specialty Business Services | 1.15 | 26 |
| Specialty Chemicals | 1.32 | 46 |
| Specialty Industrial Machinery | 1.1 | 73 |
| Specialty Retail | 0.6 | 40 |
| Staffing & Employment Services | 1.41 | 23 |
| Steel | 1.42 | 15 |
| Telecom Services | 1.1 | 33 |
| Textile Manufacturing | 1.27 | 4 |
| Thermal Coal | 1.52 | 9 |
| Tobacco | 0.66 | 6 |
| Tools & Accessories | 0.81 | 11 |
| Travel Services | 0.76 | 13 |
| Trucking | 1.32 | 11 |
| Utilities - Diversified | 0.48 | 15 |
| Utilities - Regulated Electric | 0.46 | 25 |
| Utilities - Regulated Gas | 0.51 | 14 |
| Utilities - Regulated Water | 0.69 | 12 |
| Utilities - Renewable | 1.14 | 11 |
| Waste Management | 0.92 | 12 |
The table shows that the Biotechnology industry has the highest average quick ratio of 4.55, followed by Medical Devices at 3.44. On the other hand, the Discount Stores industry has the lowest average quick ratio of 0.3, followed by the Auto & Truck Dealerships industry at 0.41. This variation is due to several factors, including industry-specific earnings and growth prospects, and management's outlook on future performance.
The following chart and table show industries with the highest quick ratio. You can filter the industries by sector in the chart below to see a breakdown of the top industries with the highest quick ratio for every sector.
| Industry | Average quick ratio | Number of companies |
|---|---|---|
| Biotechnology | 4.55 | 504 |
| Medical Devices | 3.44 | 102 |
| Medical Instruments & Supplies | 2.77 | 45 |
| Health Information Services | 2.75 | 32 |
| Diagnostics & Research | 2.75 | 67 |
| Semiconductor Equipment & Materials | 2.47 | 26 |
| Electronic Gaming & Multimedia | 2.47 | 7 |
| Asset Management | 2.32 | 72 |
| Building Materials | 2.09 | 7 |
| Semiconductors | 1.99 | 64 |
The following chart and table presents industries with the lowest quick ratio. Within the chart below, you can also refine the industries by sector, allowing you to observe a breakdown of the top industries with the lowest quick ratio in each sector.
| Industry | Average quick ratio | Number of companies |
|---|---|---|
| Discount Stores | 0.3 | 9 |
| Auto & Truck Dealerships | 0.41 | 14 |
| Utilities - Regulated Electric | 0.46 | 25 |
| Utilities - Diversified | 0.48 | 15 |
| Utilities - Regulated Gas | 0.51 | 14 |
| Lodging | 0.52 | 9 |
| Department Stores | 0.54 | 5 |
| Airlines | 0.58 | 13 |
| Grocery Stores | 0.58 | 10 |
| Home Improvement Retail | 0.58 | 7 |
Liquidity represents a company's capability to swiftly convert assets into cash to pay off its short-term liabilities. High liquidity levels suggest a strong position to meet financial commitments, reflecting positively on the company's financial stability. Liquidity ratios, like the quick ratio, are instrumental in evaluating this aspect of financial health, distinguishing between a company's short-term solvency and its overall liquidity.
The distinction between solvency and liquidity is crucial; solvency refers to a company's ability to meet long-term obligations, while liquidity focuses on short-term liabilities. A solvent company can still face liquidity issues if its assets are not readily convertible to cash.
Several factors can influence a company's quick ratio:
The quick ratio varies significantly across industries, reflecting the diverse liquidity needs and operational characteristics inherent to each industry. Here's a look at how the quick ratio manifests in various industries:
Technology and Software: Companies in this sector often exhibit higher quick ratios, primarily due to their low inventory levels and substantial cash reserves. The nature of digital products and services means less capital is tied up in physical stock, enabling these companies to maintain fluid assets ready to cover liabilities.
Retail and Consumer Goods: The retail and consumer goods sectors see a wide range of quick ratios, largely influenced by inventory turnover rates. High-volume retailers may operate with lower quick ratios due to large inventory holdings, whereas retailers with efficient inventory management and high turnover can maintain healthier quick ratios.
Manufacturing: The manufacturing industry typically shows lower quick ratios, a reflection of the capital-intensive nature of this sector. High levels of inventory and machinery, essential for production processes, mean that a significant portion of assets is not immediately liquid, potentially straining short-term liquidity.
Service Industries: Service-oriented companies generally report higher quick ratios. Given the minimal physical inventory requirements, these firms rely more on human capital and intangible assets, resulting in a liquidity profile not heavily impacted by inventory valuations.
Energy and Utilities: In these capital-intensive industries, large-scale investments in infrastructure and equipment can influence the quick ratio. However, cash flow predictability, especially in utilities, can mitigate liquidity concerns despite lower quick ratios.
An ideal quick ratio value is often cited as 1:1, indicating that a company has enough liquid assets to cover its current liabilities without relying on inventory sales. However, the "ideal" figure can vary by industry due to differing operational models and liquidity needs. Benchmarking a company's quick ratio against industry averages is crucial to gauge its relative liquidity position.
The quick ratio's limitations must also be acknowledged. It does not account for the timing of cash flows, the collectability of receivables, or the potential for inventory to be sold quicker than expected. Hence, it should be used with other financial metrics and analyses to comprehensively assess a company's financial health.
The quick ratio serves as a pivotal indicator of a company's short-term liquidity, offering valuable insights into its ability to meet immediate financial obligations without selling inventory. While the ideal quick ratio varies by industry, understanding the norm within a specific sector provides a benchmark against which companies can be evaluated. However, it's important to recognize the limitations of the quick ratio and use it in conjunction with other financial metrics for a well-rounded analysis.