Our quick ratio calculator assesses a company’s liquidity. Enter your numbers into the tool at the top of this page to see how well your business can cover its near-term debts with cash and near-cash assets. It’s a great way to check your company’s financial pulse! Follow the prompts to get a calculation you can review.
What you’ll learn
What you’ll learn
Updated: November 27, 2024
To learn more about why the quick ratio is an important metric for business owners to be familiar with, we spoke with Tom Brock, a licensed CPA and CFA Charterholder with over a decade of experience helping small businesses.
Quick ratio meaning: What is the quick ratio?
“The quick ratio, which is also referred to as the acid test ratio, is a liquidity ratio that measures a company’s ability to satisfy its near-term obligations with its most liquid assets.”
— Tom Brock, Certified Public Accounting (CPA) and Chartered Financial Analyst (CFA)
Calculating the quick ratio
What is the quick ratio formula?
Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities
How to calculate the quick ratio?
The quick ratio is calculated by dividing a company’s most liquid assets (cash, cash equivalents, marketable securities and accounts receivable) by its current liabilities.
How to find the quick ratio?
A company may disclose its quick ratio in its notes to financial statements or management discussion and analysis exhibits. However, this is not a requirement. The most straightforward way to determine a company’s quick ratio is to pull pertinent information from the balance sheet and compute it directly.
So what numbers should you add in the tool above? Once more, we caught up with Tom for some context. His breakdown of the assets and liabilities that go into the quick ratio calculation is outlined below.
What are some of the different definitions of assets?
Cash
This is the most liquid asset a company can hold. It includes physical currency and bank deposits that can be accessed immediately.
Cash equivalents
These are short-term, highly liquid investments that can be readily converted to cash. Examples include Treasury bills, certificates of deposit and money market funds.
Marketable securities
These are easily tradable financial instruments, such as stocks, bonds and exchange-traded funds, that can be quickly sold via public markets.
Accounts receivable
This asset represents money owed to a company by its customers for goods or services provided on credit. It’s considered relatively liquid, because it’s expected to be collected within a short period. In many instances, accounts receivable can also be sold to investors via factoring arrangements.
Defining current liabilities
The current liabilities balance sheet category includes all business obligations that are due within one year or a normal operating cycle, whichever is longer. Examples are as follows:
Accounts payable
These are amounts owed to vendors and business partners for goods and services purchased.
Current taxes payable
These are near-term amounts owed to federal, state and local government bodies. Generally, income tax is the most significant type of tax incurred by a business.
Accrued expenses
These are amounts incurred but not yet paid. Common examples include accrued salaries and accrued insurance premiums.
Short-term debt
This liability represents near-term obligations due to creditors. For many businesses, this includes credit card debt.
Current portion of long-term debt
This line item reflects the portion of long-term installment debt that is due within the coming year.
Understanding the quick ratio
What is a good quick ratio?
A good quick ratio is generally considered to be greater than 100%. This means you have more liquid assets than current liabilities and are unlikely to encounter any liquidity constraints during a downturn. That said, a quick ratio significantly higher than 100%, such as 300% or 400%, could be an indication of suboptimal balance sheet management and an ineffective long-term investment strategy.
What is considered a healthy quick ratio for most industries?
In most industries, a healthy quick ratio is considered to be between 100% and 150%. This indicates the wherewithal to comfortably satisfy all near-term obligations with liquid assets.
What does the quick ratio tell you about a company?
A quick ratio tells you whether or not a company is comfortably positioned to satisfy its near-term obligations. A ratio below 100% indicates a company cannot satisfy its current liabilities without liquidating assets that may not be marketable. A ratio of 100% or more indicates a company can satisfy its current liabilities with its cash, cash equivalents, marketable securities and accounts receivable.
What are some common pitfalls when calculating the quick ratio?
The most common pitfall associated with calculating the quick ratio is utilizing the wrong information. When establishing the numerator of the quick ratio formula, be sure to exclude inventory and prepaid expenses. When establishing the denominator of the formula, include all current liabilities. If you are working with a balance sheet, this subtotal will be prominently disclosed.
More on the quick ratio
How can a company improve its quick ratio?
A company can improve its quick ratio by either increasing its liquid assets or decreasing its current liabilities. One highly effective way to drive your quick ratio higher is to sell your inventory faster, thereby increasing your cash and/or accounts receivable.
What is the difference between the current ratio and quick ratio?
The quick ratio is a more stringent measure of liquidity than the current ratio. The current ratio is computed by dividing all current assets by all current liabilities. Conversely, the numerator of the quick ratio excludes the following current assets: inventory and prepaid expenses.