Quick Ratio (Acid Test Ratio) Calculator

1. What is the Quick Ratio (Acid Test Ratio) Calculator?

Definition: This calculator computes the quick ratio ($ QR $), a liquidity metric that measures a company’s ability to meet its current liabilities with its most liquid assets, excluding inventory.

Purpose: Helps investors and creditors assess a company’s short-term financial health and ability to pay off debts without selling long-term assets.

2. How Does the Calculator Work?

The calculator uses the following formulas to compute the quick ratio:

Formulas:

$ LA = CCE + MS + AR $

$ QR = \frac{LA}{CL} $

Where:

$ QR $: Quick Ratio (decimal)
$ LA $: Liquid Assets (dollars)
$ CCE $: Cash and Cash Equivalents (dollars)
$ MS $: Marketable Securities (dollars)
$ AR $: Accounts Receivable (dollars)
$ CL $: Current Liabilities (dollars)

Steps:

Step 1: Calculate liquid assets. Compute $ LA = CCE + MS + AR $.
Step 2: Determine current liabilities. Input the company’s current liabilities ($ CL $).
Step 3: Calculate quick ratio. Compute $ QR = \frac{LA}{CL} $.

3. Importance of Quick Ratio Calculation

Calculating the quick ratio is crucial for:

Liquidity Assessment: A quick ratio above 1 indicates the company can cover current liabilities with liquid assets
Financial Stability: Helps evaluate short-term solvency without relying on inventory sales.
Credit Decisions: Creditors use it to assess repayment capacity in tight cash flow situations.

4. Using the Calculator

Example 1: $ CCE = \$50,000 $, $ MS = \$30,000 $, $ AR = \$20,000 $, $ CL = \$80,000 $:

Step 1: $ LA = 50,000 + 30,000 + 20,000 = \$100,000 $.
Step 2: $ CL = \$80,000 $.
Step 3: $ QR = \frac{100,000}{80,000} = 1.25 $.
Results: $ LA = \$100,000 $, $ QR = 1.25 $.

A quick ratio of 1.25 indicates the company can cover its current liabilities 1.25 times with liquid assets.

Example 2: $ CCE = \$10,000 $, $ MS = \$5,000 $, $ AR = \$15,000 $, $ CL = \$50,000 $:

Step 1: $ LA = 10,000 + 5,000 + 15,000 = \$30,000 $.
Step 2: $ CL = \$50,000 $.
Step 3: $ QR = \frac{30,000}{50,000} = 0.60 $.
Results: $ LA = \$30,000 $, $ QR = 0.60 $.

A quick ratio of 0.60 suggests the company cannot fully cover its liabilities with liquid assets, indicating potential liquidity issues.

Example 3: $ CCE = \$100,000 $, $ MS = \$50,000 $, $ AR = \$30,000 $, $ CL = \$120,000 $:

Step 1: $ LA = 100,000 + 50,000 + 30,000 = \$180,000 $.
Step 2: $ CL = \$120,000 $.
Step 3: $ QR = \frac{180,000}{120,000} = 1.50 $.
Results: $ LA = \$180,000 $, $ QR = 1.50 $.

A quick ratio of 1.50 indicates strong liquidity, with a 50% buffer over liabilities.

5. Frequently Asked Questions (FAQ)

Q: What is a good quick ratio?
A: A quick ratio above 1 is generally favorable, with 1.5–2 considered strong, though it varies by industry.

Q: Why exclude inventory?
A: Inventory may not be quickly convertible to cash at full value, making the quick ratio a stricter test of liquidity than the current ratio.

Q: Can the quick ratio be negative?
A: No, as liquid assets and current liabilities are typically positive; a ratio below 1 indicates insufficient liquidity.