# How to Calculate Quick Ratio

Quick ratio is one of the indicators of a company’s short-term liquidity. Also referred to as the acid test ratio, it measures how well a firm is able to meet its current liabilities with its highly liquid assets, which include cash and cash equivalents, marketable securities and accounts receivable. It's normal for a company to have a quick ratio of 1. This indicates that the amount of a firm’s assets with high liquidity is equal to its short-term obligations. However, more accurate conclusion requires a comparison of quick ratio value with past periods and with industry averages. For some industries, a quick ratio value below 1 might be satisfying, while for other it would be unacceptable. Enterprises that sell their product for cash only with no involvement of receivables can still have a good liquidity level with quick ratio moderately below 1. On the other hand, firms that actively provide their buyers with consumer loans might face slow accounts receivable turnover, which in its turn might cause big number of bad quality receivables. Such companies would most likely be on an unsatisfactory liquidity level even with quick ratio values much greater than normal.

### Part 1 Understanding Quick Ratio

1. 1
Understand current assets. Current assets is a term referring to the balance sheet account, which represents assets, convertible into cash within one year (or a business cycle). The examples of current assets are cash and cash equivalents, inventory, marketable securities, accounts receivable etc.
2. 2
Understand current liabilities. Current liabilities include all obligations of a company, which are payable during one year (or a business cycle). The examples of current liabilities are accounts payable, interest payable, accrued expenses, customer deposits etc.
3. 3
Understand inventory. Inventory is a term referring to those assets that either are used or supposed to be used in the production process, or already exist in a form of product ready for sale. Most commonly inventory is being divided into three categories: raw materials, work-in-progress and finished goods.
4. 4
Understand your basic formula. Most common formula for calculating quick ratio is current assets (excluding inventory) divided by current liabilities. Inventory is being excluded from calculation in order to get more precise estimation of company’s short-term liquidity, since inventory is not always quick enough to be converted into cash. All the numbers necessary for calculation can be obtained from the company’s balance sheet.

### Part 2 Calculating Quick Ratio

1. 1
Calculate current assets. The first step to calculating quick ratio is finding the company’s current assets. Commonly total current assets are reflect as a separate line of the company’s balance sheet. They can also be calculated by subtraction of the company’s non-current assets from its total assets.
• Imagine a company with \$600,000 in total assets and \$350,000 in non-current assets. By subtracting non-current assets from total assets, you get the amount of the company’s current assets: \$600,000 - \$350,000 = \$250,000.
2. 2
Determine inventory. This number can be simply obtained from the company’s balance sheet. Let’s say that for the analyzed company the inventory value equals \$80,000.
3. 3
Calculate current liabilities. Once you're done with finding the company's current assets and inventory, you can proceed to the next step - determining its current liabilities. This can be done by reviewing the company’s balance sheet and finding the current liabilities amount there, in case they are reflected on the balance sheet as a separate line. If not, you can calculate it by subtracting the company’s non-current liabilities from its total liabilities.
• Imagine a company with \$400,000 in total liabilities and \$180,000 in non-current liabilities. By subtracting non-current liabilities from total liabilities we get the amount of the company’s current liabilities: \$400,000 - \$180,000 = \$220,000.
4. 4
Find the quick ratio. After determining all the necessary figures, use the basic quick ratio formula and calculate the quick ratio for your company.
• In the example above quick ratio is calculated as current assets minus inventory, divided by current liabilities: (\$250,000 - \$80,000) ÷ \$220,000 = 0.77, indicating some problems with liquidity of the company analyzed. Quick ratio of 0.77 means that there was \$0.77 of highly liquid assets for every \$1.00 of current liabilities.

## Tips

• Quick ratio is also very often referred as acid test ratio.
• Optimal for a firm is the situation, when quick ratio equals 1, or close to it.

## Article Info

Categories: Mathematics