Quick Ratio or Acid test ratio

It is the liquidity ratio that measures a firm’s ability to pay off its short term liabilities with only
quick assets (inventory is omitted from quick assets because of the uncertainty of the timing of
cash flows from its sale).
In other words, it reflects the number of times cash, Accounts receivables and marketable
securities cover short term liabilities.
(Measure immediate liquidity).
The quick ratio is more stringent test of short term liquidity than is the current ratio.
A higher number is preferred.
For Saudi Cement Company, in 2017 it has 0.4 SR of liquid assets for every 1 SR in current
Liabilities and it is the lowest ratio over the recent years.
In 2015 the ratio was 0.57 and it was the highest.
By comparing these ratios with the index ratio equal 1.9, we will find that Saudi cement
Company had a relatively lower ratio.

For Najran Cement Company, in 2017 it has 0.44 SR in cash and near cash assets for every 1 SR
in current Liabilities.

When inventory is omitted from current assets the ratio is markedly decreased from 2.86 (current
ratio) to 0.44 (quick ratio).

This reflects that inventory might not be easily and quickly converted into cash, and furthermore,
that Najran Cement Company would probably not be able to sell all of its inventory for an
amount equal to its carrying value, especially if it were required to sell the inventory quickly.

In this case where inventory turnover ratio (0.7 in 2017), the quick ratio is a better indicator of
liquidity that is the current ratio.
By comparing these ratios with the competitor’s ratios, we will find that Najran Cement
Company has relatively higher ratio which indicates a higher level of liquidity.
i.e., a greater ability to meet short term obligation