Another financial ratio commonly used to understand business liquidity is the quick ratio, or as it’s often called the acid test ratio. Our short article takes you through the quick ratio formula and calculator to help you better understand this important accounting tool.
The difference between the current ratio and the quick ratio is that the quick ratio only includes cash, marketable securities (easily convertible into cash) and accounts receivable. The quick ratio, therefore, excludes stock or inventory.
Quick Ratio Formula
To get the quick ratio, use the following formula:
Quick Ratio (or Acid Test Ratio)= (Cash + Accounts Receivable + Marketable Securities)/Current Liabilities
You can also use the following formula if current assets only include current assets per the equation above plus stock:
Quick Ratio (or Acid Test Ratio) = (Current Assets – Stock) / Current Liabilities
Let’s say, for example, that company A has the following :
- Cash : $500,000
- Accounts Receivable :$1,500,000
- Current Liabilities: $1,000,000
Therefore, the quick ratio is : (1,500,000 + 500,000) /1 ,000,000 = 2
The quick ratio assesses whether a company will cover its current liabilities from its current assets as they are due. Therefore, if you want to analyze the quick ratio, the following apply:
If the quick ratio is higher than 1 (ideally as high as possible), the company appears to be able to repay its current liabilities as they are falling due.
If the quick ratio is lower than 1, the company might be unable to repay some of its current liabilities, and the company might face a liquidity squeeze.
Quick Ratio (Acid Ratio Test) Calculator
The calculator below will help you find the quick ratio by taking the current assets less the inventory and dividing it by the current liabilities. To be more precise and as explained above, the quick ratio only includes cash, marketable securities and accounts receivable. However, most companies only have the above assets plus stock. Therefore, by taking the total current assets and deducting the stock, we get the same figure.