What is the formula used to calculate the Quick Ratio?

The formula for calculating the Quick Ratio is designed to measure a company's short-term liquidity by determining its ability to pay off short-term liabilities without relying on the sale of inventory. By using the formula of (Current Assets - Inventory) divided by Current Liabilities, this ratio provides a more stringent test of liquidity than the current ratio, which includes inventory.

Current assets encompass cash, accounts receivable, and other assets that can be quickly converted to cash, whereas inventory may not be as readily liquid in times of urgency. Therefore, the calculation subtracts inventory from current assets to focus on the most liquid resources available to meet current liabilities. This approach ensures a clearer understanding of a company's immediate financial health, as it reflects only the most easily accessible assets that can cover short-term obligations.