Quick Ratio Calculator

The quick ratio — also called the acid test ratio — is a simple financial ratio that measures a company’s ability to meet long and short-term debt obligations. The ratio is based on a company’s total long and short-term liability divided by its total current liabilities that are highly liquid —i.e., quickly turned into cash.   

A company’s quick ratio measures whether it produces enough cash flow to meet current obligations. The quick ratio does not account for the current inventory, which must be sold to be converted into cash. In this way, it also speaks to a company’s liquidity.

Assets included in the quick ratio are

• Cash
• Cash equivalents
• Accounts receivable
• Stocks
• Treasury bills and bonds

With the quick ratio, the higher the number, the better. A quick ratio of one means the company has precisely enough liquid assets to cover its liabilities. Anything under one means that, should a company go bankrupt, at least some of its creditors will not get repayment. Not ideal.

The threshold for a good ratio depends on the industry, but most of the time falls between 1.5 and 2. Anything above one is better than one or below. But it’s better to aim for a quick ratio above 1.5. This provides wiggle room for readjusting strategies when something affects liquidity or the cost of debt.  

You can compute the quick ratio for your or any public company in four steps. 

1. Gather and review your financial statements or get the annual report of the company you’re reviewing. Be sure you’re using the most recent information available. 
2. Find the cash and cash equivalents, accounts receivable, and marketable securities on your balance sheet. Sometimes marketable securities are listed as “ investments in financial assets due within one year.” Plug these figures into their corresponding field on the calculator (or add by hand) to get the total assets. 
3. Review the current liabilities on your balance sheet, including accounts payable, debt payments, income tax, short-term provisions, and more. If these aren’t already totaled on the balance sheet, add them to get the total current liabilities. 
4. Enter these figures into our calculator. You can also plug them into the formula and compute them by hand.

Double-check your work with your accountant to ensure accuracy if this is new to you. The quick ratio formula is only as reliable as the information provided.

The Loominary is a clothing manufacturer looking to expand and is ready to set a budget. Before the leadership team decides how much new debt they can carry, they need an accurate picture of their current liquidity.

They gather financial statements and find $48K cash between their bank accounts and checking accounts, $74K in marketable securities, and $139k in accounts receivable. Their total current asset calculation looks like this. 

$261,000 total current assets = ($48,000 cash + $139,000 marketable securities + $74,000 accounts receivable)

The company’s total liabilities are listed as $115k on the balance sheet. So the quick ratio calculation looks like this: 

2.27 quick ratio = $261,000 liquid assets / $115,000 current liabilities

The Loominary’s quick ratio indicates the company is in good financial shape. Leadership has even found room to take on additional liabilities to grow their business. They can check to see how much debt they can take on by reverse engineering the formula this way:

maximum healthy liability = liquid assets / quick ratio

If their bare minimum quick ratio is 1.5, then the calculation looks like this:

$174,000 maximum healthy liability = $261,000 liquid assets / 1.5 quick ratio

Now they can subtract current liabilities from hypothetical liabilities to see the maximum budget they can allow

$59,000 = $174,000 maximum healthy liability – $115,000 current liabilities

Remember: It’s always a good idea to discuss new liabilities with your financial advisor, mentor, and other trusted advisors. 

There are three strategies to increase the quick ratio of your business. 

1. Increase sales and inventory turnover: Sell your inventory faster with the help of discounts, increased marketing, and staff sales training. 
2. Pay down short-term obligations faster: Make larger payments toward the principal or sell an illiquid asset (equipment, real estate) to pay off debt.
3. Reduce invoice collection period: Look for ways to get money faster, such as incentivizing faster payment (e.g., discount for paying early). 

But remember that any strategy that makes sense for your business and either increases liquid assets or decreases liabilities will benefit your quick ratio.

The quick and current ratios are liquidity ratios and important metrics you can use to monitor a company’s liquidity. The difference between the two is the current ratio includes inventory in the numerator. In other words, it accounts for all existing assets.

The quick ratio is more restrictive, as it does not include inventory in its calculation. Unlike cash, cash equivalents, marketable securities, and accounts receivable, inventory is not a liquid asset. At least it is less liquid than the former. This means the quick ratio provides a more conservative measure of a company’s ability to cover current financial obligations.