What is Quick Ratio?
The quick ratio (acid-test ratio) is a liquidity ratio that measures a company’s ability to cover its short-term liabilities with its most liquid assets, excluding inventory. It equals (current assets – inventory) / current liabilities.
How It Works
- Sum cash, receivables, and short-term investments.
- Divide by current liabilities.
- A ratio above 1.0 indicates the company can cover short-term obligations without selling inventory.
Saudi Context
Saudi banks evaluating SME loans under Kafalah typically expect a quick ratio above 0.8 to 1.0 for trading and services businesses.
Example
A Saudi services company has SAR 4 million in liquid assets and SAR 3 million current liabilities, giving a quick ratio of 1.33.