Quick Ratio Calculator
The quick ratio calculator helps you calculate the value of a quick ratio - one of the simple liquidity indicators used in corporate finance to assess the liquidity of a company. Note that the quick ratio is also known as an acid-test ratio, so obviously this calculator also allows you to calculate the value of the acid-test ratio. In the text below, you will also find useful information about the quick ratio formula. This text should also help you answer the following questions:
- What is a quick ratio?
- How to calculate quick ratio?
- What is a good quick ratio?
What is a quick ratio (acid-test ratio)?
The quick ratio (acid-test ratio) is a simple indicator used to measure the ability of a company to meet its short-term obligations with its most liquid assets. In other words, the quick ratio allows you to determine whether or not a company has enough resources to fulfill its obligations that are due within a year. The current ratio is a very similar liquidity indicator, which we described in the current ratio calculator.
As you can see, the quick ratio calculator is of utmost importance. Imagine if a company could not meet its short-term obligations. It would not be able to buy more inventory which would stop it from getting sales, halting the business operations entirely. Bankruptcy and stock price drawdown would become inevitable.
The quick ratio formula (acid test ratio formula)
The general formula for any liquid ratio is:
liquid_ratio = liquid_assets / current liabilities
In the case of acid test ratio, the formula is:
quick_ratio = (cash_and_cash_equivalent + marketable_securities + accounts_receivable) / current_liabilities
Note that liquid assets are considered here as assets that can be quickly converted to cash at a value close to their book values.
You can obtain the exact values of this equation's particular factors on the basis of the company’s annual report (balance sheet).
Did you know that data in the annual report also allows you to calculate profitability ratios, such as the return on equity and assets? What if we tell you there are tools that indicate the profits you could make versus the risk you are assuming? Check the Sortino ratio calculator for that kind of insight.
How to calculate quick ratio with our calculator?
Start with checking the financial statements of the analyzed company.
In the balance sheet prepared in accordance with the IFRS (), in the part concerning current assets, you should find positions “Cash and Cash Equivalents”, “Investments in Financial assets due within one year” (this position is more or less the same as “Marketable securities”) and “Accounts Receivable”.
In the part of a balance sheet concerning the liabilities, find the position “Current Liabilities”. They are the sum of accounts payable, current income tax payable, current portion of loans payable, short-term provisions, and other current liabilities.
Fill the appropriate fields in our calculator and obtain the value of the quick ratio.
You can find out more about the interpretation of this value in the next section of this article.
What is a good quick ratio?
A quick ratio equal to 1.0 means that the value of a company’s assets that are precisely convertible to cash exactly match its current liabilities. The quick ratio lower than 1 indicates that a company, at a particular moment, cannot fully pay back its current obligations. It leads to the conclusion that the optimal value of the quick ratio (acid ratio) is 1.0 or higher.
It is worth remembering that the general rule says that the higher the quick ratio, the higher the company's liquidity. Although most financial analysts agree that a quick ratio higher than 1.0 is acceptable, you should know that its optimal value depends on the branch of the industry.
When analyzing a company's liquidity, it is a good practice to compare its current value to values calculated from previous financial statements. It is also worth obtaining the average liquidity ratios in companies similar to those analyzed. It can provide information about company trends and act as an early warning sign of a problem.
In case you think stock picking is complicated, you can also invest in ETFs, which are like baskets of stocks. Even better, you can invest in commodities such as oil or gold. Just be careful of the margin calls (check the margin call calculator for more information).
The quick ratio vs. the current ratio
The quick ratio is sometimes confused with the current ratio. Both of these indicators are liquidity ratios used to measure a company's ability to meet its obligations. However, in the quick ratio, the definition of liquid assets is slightly more restricted as it does not include inventory. In the current ratio, this position is counted, so the nominator is simply defined as current assets.
If you are interested in corporate finance, you may also try our other useful calculators - the EBIT calculator and the EBITDA calculator.