# Definition of quick relationship

By Mark Holland / last month

## What is the quick relationship?

The rapid index is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets.

Since it indicates the company’s ability to instantly use its near-cash assets (assets that can be quickly converted to cash) to pay its current liabilities, it is also called the litmus test index. A “litmus test” is a slang term for a quick test designed to produce instant results.

### Key takeaways

• The quick index measures the ability of a company to pay its current liabilities without having to sell its inventory or obtain additional financing.
• The quick ratio is considered a more conservative measure than the current ratio, which includes all current assets as a hedge for current liabilities.
• The higher the result of the ratio, the better the liquidity and financial health of a company; the lower the ratio, the more likely it is that the company will have difficulty paying its debts.

## Understand the quick relationship

The quick ratio measures the dollar amount of available liquid assets versus the dollar amount of a company’s current liabilities. Liquid assets are those current assets that can be quickly converted into cash with minimal impact on the price received in the open market, while current liabilities are the debts or obligations of a company that must be paid to creditors within a period of time. anus.

A result of 1 is considered the normal rapid ratio. It indicates that the company is fully equipped with exactly enough assets to be instantly liquidated to pay its current liabilities. A company with a rapid ratio of less than 1 may not be able to fully settle its short-term current liabilities, while a company with a rapid ratio of greater than 1 may be able to instantly shed its current liabilities. For example, a quick ratio of 1.5 indicates that a company has $1.50 of liquid assets available to cover every$ 1 of its current liabilities.

While these number-based indices provide information on the viability and certain aspects of a business, they may not provide a complete picture of the overall health of the business. It is important to look at other associated measures to assess the true picture of a company’s financial health.

## The quick ratio calculation

The formula for calculating the quick ratio is: