Quick Ratio (Acid-Test Ratio) Calculator
This calculator helps determine a company's ability to meet short-term obligations using its most liquid assets (excluding inventory).
Formula: Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Enter Financial Data
Understanding the Quick Ratio
What is the Quick Ratio?
The Quick Ratio (Acid-Test Ratio) measures a company's ability to pay its current liabilities without selling inventory. It's a stricter version of the Current Ratio that excludes less liquid assets.
Quick Ratio Formula
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
A ratio >1 indicates good short-term financial health, while <1 suggests potential liquidity issues.
Key Components
- Cash & Equivalents: Physical currency, bank balances, and highly liquid investments
- Marketable Securities: Short-term investments convertible to cash within 90 days
- Accounts Receivable: Money owed by customers (expected within 1 year)
- Current Liabilities: Debts due within 12 months (payables, short-term loans, etc.)
Real-World Quick Ratio Examples
Example 1: Healthy Technology Company
Scenario: Tech company with strong cash reserves.
Inputs:
- Cash: $50,000
- Marketable Securities: $30,000
- Accounts Receivable: $20,000
- Current Liabilities: $80,000
Calculation:
Quick Assets = $50,000 + $30,000 + $20,000 = $100,000
Quick Ratio = $100,000 / $80,000 = 1.25
Interpretation: The company can cover 125% of its current liabilities with liquid assets.
Example 2: Retail Business with Tight Cash Flow
Scenario: Retail store experiencing cash flow challenges.
Inputs:
- Cash: $5,000
- Marketable Securities: $2,000
- Accounts Receivable: $3,000
- Current Liabilities: $12,000
Calculation:
Quick Assets = $5,000 + $2,000 + $3,000 = $10,000
Quick Ratio = $10,000 / $12,000 = 0.83
Interpretation: The business may struggle to meet short-term obligations without selling inventory.
Example 3: Manufacturing Company
Scenario: Manufacturer with substantial receivables.
Inputs:
- Cash: $25,000
- Marketable Securities: $10,000
- Accounts Receivable: $65,000
- Current Liabilities: $70,000
Calculation:
Quick Assets = $25,000 + $10,000 + $65,000 = $100,000
Quick Ratio = $100,000 / $70,000 = 1.43
Interpretation: Strong liquidity position despite large receivables.
Example 4: Startup Company
Scenario: Early-stage tech startup.
Inputs:
- Cash: $200,000
- Marketable Securities: $0
- Accounts Receivable: $5,000
- Current Liabilities: $150,000
Calculation:
Quick Assets = $200,000 + $0 + $5,000 = $205,000
Quick Ratio = $205,000 / $150,000 = 1.37
Interpretation: Healthy liquidity despite minimal receivables.
Example 5: Service Business
Scenario: Consulting firm with minimal physical assets.
Inputs:
- Cash: $15,000
- Marketable Securities: $5,000
- Accounts Receivable: $30,000
- Current Liabilities: $35,000
Calculation:
Quick Assets = $15,000 + $5,000 + $30,000 = $50,000
Quick Ratio = $50,000 / $35,000 = 1.43
Interpretation: Comfortable liquidity position typical for service businesses.
Example 6: Seasonal Business
Scenario: Holiday decor business post-season.
Inputs:
- Cash: $8,000
- Marketable Securities: $2,000
- Accounts Receivable: $5,000
- Current Liabilities: $20,000
Calculation:
Quick Assets = $8,000 + $2,000 + $5,000 = $15,000
Quick Ratio = $15,000 / $20,000 = 0.75
Interpretation: Potential cash flow issues during off-season.
Example 7: Large Corporation
Scenario: Fortune 500 company analysis.
Inputs:
- Cash: $5,000,000
- Marketable Securities: $3,000,000
- Accounts Receivable: $7,000,000
- Current Liabilities: $12,000,000
Calculation:
Quick Assets = $5,000,000 + $3,000,000 + $7,000,000 = $15,000,000
Quick Ratio = $15,000,000 / $12,000,000 = 1.25
Interpretation: Strong liquidity position for a large corporation.
Example 8: Nonprofit Organization
Scenario: Charity with grant funding.
Inputs:
- Cash: $120,000
- Marketable Securities: $30,000
- Accounts Receivable: $50,000
- Current Liabilities: $150,000
Calculation:
Quick Assets = $120,000 + $30,000 + $50,000 = $200,000
Quick Ratio = $200,000 / $150,000 = 1.33
Interpretation: Healthy liquidity despite high liabilities from upcoming programs.
Example 9: Restaurant Business
Scenario: Local restaurant chain.
Inputs:
- Cash: $25,000
- Marketable Securities: $5,000
- Accounts Receivable: $2,000
- Current Liabilities: $40,000
Calculation:
Quick Assets = $25,000 + $5,000 + $2,000 = $32,000
Quick Ratio = $32,000 / $40,000 = 0.8
Interpretation: Typical for restaurants which rely more on inventory turnover.
Example 10: E-commerce Business
Scenario: Online retailer with quick receivables.
Inputs:
- Cash: $75,000
- Marketable Securities: $25,000
- Accounts Receivable: $10,000
- Current Liabilities: $80,000
Calculation:
Quick Assets = $75,000 + $25,000 + $10,000 = $110,000
Quick Ratio = $110,000 / $80,000 = 1.375
Interpretation: Strong position due to immediate payment processing.
Frequently Asked Questions
1. What's considered a good Quick Ratio?
A ratio of 1.0 or higher is generally good, indicating the company can cover current liabilities without selling inventory. However, ideal ratios vary by industry.
2. How does Quick Ratio differ from Current Ratio?
The Current Ratio includes inventory in current assets, while the Quick Ratio excludes it as inventory may not be quickly convertible to cash.
3. Why exclude inventory from the calculation?
Inventory may be obsolete, illiquid, or sold at a loss in emergencies. The Quick Ratio focuses on assets that can be immediately used to pay debts.
4. Can the Quick Ratio be too high?
Yes. A very high ratio (>2) may indicate inefficient use of cash that could be invested in growth opportunities.
5. How often should I calculate this ratio?
At least quarterly for ongoing businesses, or when assessing financial health before major decisions.
6. What industries typically have lower Quick Ratios?
Retail and manufacturing often have lower ratios due to high inventory levels, while service businesses typically have higher ratios.
7. Should I include prepaid expenses in quick assets?
No. Prepaid expenses are excluded as they can't be used to pay liabilities (they've already been paid).
8. How does accounts receivable aging affect the ratio?
Old receivables may be uncollectible. Some analysts adjust receivables by subtracting an allowance for doubtful accounts.
9. What if my Quick Ratio is below 1?
Consider: increasing cash reserves, accelerating receivables collection, renegotiating payment terms with creditors, or securing short-term financing.
10. How do I improve my Quick Ratio?
Strategies include: collecting receivables faster, converting excess inventory to cash, paying down current liabilities, or increasing cash reserves through financing.
