How is the quick ratio calculated?

The quick ratio, also known as the acid-test ratio, is a financial metric used to assess a company's short-term liquidity and its ability to meet its current obligations without relying on the sale of inventory. This ratio is particularly useful because it provides a more stringent test of liquidity than the current ratio by excluding inventory, which may not be as readily convertible to cash in emergencies.

The formula for the quick ratio is derived from the subtraction of inventory from current assets, reflecting only those assets that are liquid or near-liquid. Therefore, it is calculated by taking current assets and subtracting inventory, then dividing that result by current liabilities. This gives a clear picture of the company's ability to cover its short-term obligations with its most liquid assets, such as cash, cash equivalents, and receivables.

Thus, the formula presented in the answer correctly represents this calculation, enabling the analyst or stakeholder to quickly determine the short-term financial health of an organization. The focus on liquid assets ensures a more conservative view of how well a company can handle immediate financial pressures.