The quick or acid-test ratios provide a better measure of overall liquidity only when a business’ stock (inventory) can’t be easily converted into cash, or where there is significant value in current assets that is unlikely to be converted to cash (e.g. prepaid expenses, deferred tax).

So, as with the current ratio, you can’t simply look at the ratio and make a judgement. If stock is easily convertible into cash, or there are no significant illiquid current assets, the quick ratio could give you the wrong picture (in the sense that liquidity looks worse than it actually is) and then, in that case, the current ratio should be the preferred measure of overall liquidity.

We’ve talked about the role of current assets in an assessment of the liquidity ratios but there’s another element to consider of course – the current liabilities. In the next post in this series about the liquidity ratios, we’ll take a look at what you need to think about as far as the liabilities are concerned.