The liquidity ratio that subtracts inventory from current assets before dividing by current liabilities is the quick ratio.
Its basic form is (current assets − inventory) ÷ current liabilities. In a more detailed version, quick assets may include cash and cash equivalents, marketable securities, and accounts receivable, while also excluding prepaid expenses. The ratio is intended to test whether a company could meet short-term obligations without relying on selling inventory.
The quick ratio is more conservative than the current ratio because inventory may take time to sell, may require discounts, or may not be readily convertible into cash. The current ratio includes inventory and is calculated as current assets divided by current liabilities. The cash ratio is stricter still because it generally focuses only on cash and cash equivalents, sometimes with marketable securities.
A quick ratio near 1 is often used as a rough benchmark, but there is no universal ideal. Retailers may operate with lower quick ratios because they turn inventory into cash rapidly, while companies with slow-moving stock may need more liquid resources.