Yes, knowing the entire financial health of your business is great, but there are times when all you want to know is your company's short term liquidity, and for that the quick ratio or acid-test ratio is where to look.
Here's what it looks like:
The quick ratio will tell you if your company is able to pay its short-term bills using your most liquid assets (cash, money in bank accounts, money market mutual funds, and US Treasury bills)
It's like the current ratio in the sense that it measures your ability to pay short-term debts, but it's more conservative of a measurement because it takes out inventory from your current assets. The inventory is subtracted from the current assets because some businesses can't quickly turn their inventory into cash. The current ratio can sometimes overestimate a company's ability to pay its short-term bills.
For example, if current assets equal $15,000 current inventory equals $6,000 and current liabilities equal $3,000, then quick ratio amounts to: ($15,000 - $6,000)/$3,000 = 3. Since we subtracted current inventory, it means that for every dollar of current liabilities there are three dollars of easily convertible assets.
Ideally, your company's quick ratio should be 1:1. The higher the ratio, the stronger your company is.
Learn more about inventory ratios. Download the Inventory Turnover Ratio white paper.