Lesson 1 of 7
Reading a quick ratio
A quick ratio of 1.0 is the point where liquid assets match what falls due within a year. That is a definition, and whole industries sit below it by design.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- The quick ratio is current assets less inventory divided by current liabilities, where 1.0 means liquid assets exactly match what falls due within a year.
- Graham set a current-ratio floor of 2.0 for industrial companies. It sits above the US median of 1.86, so more than half the measured cohort falls below it.
- The highest sector median is not the safest group, and drawing on a credit line can make the ratio look worse on the day the company secured its cash.
The quick ratio removes inventory from current assets before dividing by current liabilities, because stock is the current asset least certain to become cash. A reading of 1.0 is arithmetic, not a pass mark, and treating it as a standard is the most common error with the measure.
Where Graham's floor of 2.0 sits among US current ratios
Graham's floor, 2.0: between the median (1.86x) and the 75th percentile (3.59x).As a floor it admits between a quarter and a half of the cohort.
- 5th percentile: 0.45x
- 10th percentile: 0.69x
- 25th percentile: 1.10x
- median: 1.86x
- 75th percentile: 3.59x
- 90th percentile: 8.06x
Two published quick ratios
One version subtracts inventory from current assets. The other adds up only cash, short-term investments and receivables. They are not the same number: the subtraction version keeps prepaid expenses and other current-asset lines, and the addition version discards everything but the three named items. The gap between them on one balance sheet is whatever else sits in current assets. ValueScreener stores the current ratio and the quick ratio as separate figures. Its quick ratio is the vendor's trailing-twelve-month figure where one is published, otherwise current assets less inventory over current liabilities, so check which version a second source used before comparing.
The highest median is not the safest sector
Current ratio by sector, median
- Utilities · 103 companies0.80x
- Consumer Cyclical · 410 companies1.44x
- Industrials · 537 companies1.75x
- Healthcare · 916 companies3.40x
Median, all US companies: 1.86x
Healthcare's median of 3.40 is the highest of the four, and it is not the safest group. A large share of listed healthcare companies are development stage, holding raised cash against small payables. A high ratio here measures how much was raised, not whether the company survives the rate it is spending at, and no liquidity ratio contains a rate. Utilities sit at the other end because regulated revenue arrives whether or not the economy is good, so a low ratio there describes how the business is funded rather than how safe it is.
Businesses paid before they pay
A supermarket collects at the till and pays suppliers weeks later. Its current liabilities are large, its receivables are almost nothing, and a healthy quick ratio sits well below 1.0 every year. Restaurants and subscription businesses work the same way: a subscriber's advance payment is a contract liability, an obligation to deliver a service rather than to pay money, and the ratio treats it the same as a bill coming due.
The liquidity neither ratio sees
An undrawn committed revolving credit facility is neither an asset nor a liability, so it appears on no balance sheet and in neither ratio. It sits in the debt note and in the liquidity discussion in Item 7. Drawing on it adds the same amount to cash and to current liabilities, which pulls both ratios towards 1.0. A company above 1.0 looks tighter on the day it secured its cash. If the drawing is classed as long-term debt, both ratios rise instead.
Receivables enter net of an allowance that is management's own estimate, the kind of figure Fridson and Alvarez treat with scepticism.
Check yourself
A company's quick ratio is exactly 1.0. What does that mean?
- The company is in good financial health
- Liquid assets excluding inventory exactly match current liabilities
- The company holds no inventory
Show the answer
Answer: B.
A ratio of 1.0 is a definition, not a verdict: current assets less inventory equal current liabilities exactly. Whether that is comfortable depends on the business.Why does the quick ratio remove inventory from current assets?
- Inventory is not a current asset
- Inventory is the current asset least certain to become cash quickly
- Inventory has no value on the balance sheet
Show the answer
Answer: B.
Inventory sits on the balance sheet at cost and depends on customers wanting to buy it. The quick ratio asks what is left once that uncertainty is removed.An undrawn revolving credit facility appears where on the balance sheet?
- As a current asset
- As a current liability
- Nowhere; it is disclosed in the debt note and Item 7
Show the answer
Answer: C.
An unused facility is neither an asset nor a liability until drawn, so neither the current ratio nor the quick ratio can see it.Sources
- Graham, The Intelligent Investor, revised edition 1973, chapter 14, the defensive investor's current-ratio test.
- Fridson and Alvarez, Financial Statement Analysis, on statements prepared by parties with an interest in the impression they create.
- The current ratio distribution published on the open research pages of ValueScreener, built 2026-09-07.
What this leaves out
- The distribution was built on 2026-09-07 from filed statements on record that day and is rebuilt on a schedule, so a later reader sees different breakpoints and cohort sizes.
- Banks, equity REITs, insurers and mortgage REITs are excluded because they carry no current or non-current split; 617 companies sit outside the cohort above.
- The two-company comparison uses round invented figures.
- Nothing here is advice about any security.