Quick ratio is calculated as total current assets minus inventory for the most recent financial period divided by total current liabilities for the same period. Current assets include short term assets like cash, inventory and receivables whereas current liabilities includes obligations that are due within 1 year such as short term debt, accounts payable etc. Since inventory cannot always be sold off at short notice, it is not considered a liquid asset.
Suppose total current assets of a company is Rs.250, inventory is Rs.50 and current liabilities is Rs.300, quick ratio can be calculated as (250 – 50) / 300 = 0.67. So the company has Rs.0.67 quick asset to meet every Rs.1 current liability.
Quick ratio allows to understand how quickly a company can meet its short term financial obligations by monetising liquid assets. Higher the quick ratio better the liquidity situation of the company. Quick ratio of 2 or more companies operating in the same sector can be compared with each other.