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. A very similar to quick ratio indicator of liquidity is current ratio.
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 the value close to their book values. You can obtain the exact values of this equation 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 return on assets?
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, is not able to 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 he company’s liquidity. Although the majority of financial analysts agrees that the quick ratio higher than 1.0 is acceptable, you should know that its optimal value depends on the branch of industry.
The quick ratio vs. the current ratio
The quick ratio is sometimes confused with the current ratio. Both of these indicators are liquidity ratios and are used to measure the ability of a company to meets its obligations. However, in the quick ratio the definition of liquid assets is slightly more restricted as it does not include inventory. In 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.