Employees are paid regularly by their employers, sometimes monthly and sometimes annually, but most frequently every month. Salaries are determined for most companies in the same place and sector. But, have you ever wondered how the company knows how much money they have? Moreover, if you are launching a business and would like to see how your company stands financially, this is the right place for you. With this Quick Ratio Calculator, you can see if your firm has enough assets to pay short-term obligations.

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Quick Ratio (Acid Test Ratio) – Definition

The acid-test ratio, also referred to as the quick ratio, is a calculation that utilizes a company’s balance sheet data to determine whether it has enough short-term assets to pay its short-term obligations.

Quick Ratio (Acid Test) – Formula

The standard formula for calculating quick ratio is:

Acid\;Test=\frac{Cash+Marketable\;Securities+AR
​}{Current\;Liabilities}

Where: AR stands for Account receivable. But, we can also calculate the numerator by taking all total assets and subtracting liquid assets. Most notably, you should eliminate the inventory, keeping in mind that this would negatively skew the picture due to the volume of inventory carried by retail enterprises.

In addition, other assets on a balance sheet, including loans to vendors, prepaid expenses, and deferred tax assets, should be deducted if they cannot be utilized to fulfill liabilities in the immediate term.

Quick Ratio Interpretation

It is a sign of an organization’s solvency and should be examined over time and in the context of the industry in which the company operates. Moreover, corporations should maintain a ratio that maintains a good advantage against liquidity risk, taking into account the factors in a particular industry, among other factors.

Furthermore, as the business environment becomes more uncertain, organizations are more prone to maintain greater quick ratios. In contrast, corporations would like to keep the quick ratio lower, where free cash flow is predictable and consistent. Also, in any instance, businesses must strike the right balance between the risk of liquidity posed by a low ratio and the chance of losing posed by a high ratio.

When trying to interpret and evaluate the acid ratio over time, it’s important to consider seasonal variations in some industries, which can cause the ratio to be customarily greater or lesser during certain points of time of the year because seasonal companies experience invalid effusion of activities, resulting in fluctuating levels of current assets and liabilities.

Quick Ratio vs. Current Ratio

The current and quick ratios assess a company’s short-term liquidity or potential to produce sufficient funds to pay off all of its debts if they all come due simultaneously. They’re both indicators of a company’s financial health, but they’re not the same. Because it considers fewer elements in its calculation, the quick ratio is more cautious than the current ratio.

A company’s capacity to pay present or short-term obligations (debt and payables) with current or short-term assets is measured by the current ratio (cash, inventory, and receivables).

Furthermore, the quick ratio calculator determines a company’s liquidity by determining how well its current assets can cover its current liabilities. On the other hand, the quick ratio is a more prudent measure of liquidity because it excludes some of the factors included in the current ratio. For example, only assets converted to cash in 90 days or fewer are included in the quick ratio, often known as the acid-test ratio.

Quick Ratio – How to Calculate?

We calculate it by taking the total of marketable securities, accounts receivable, and current liabilities and dividing it by current liabilities:

Quick \;Ratio=\frac{C+CE+CR+STI}{CL}

Where:

C – Cash

CE – Cash Equivalents

CR – Current Reveivables

STI – Short-Term Investments

CL – Current Liabilities.

You can still estimate the quick ratio if a firm’s financials don’t split its fast assets. Furthermore, you can divide the difference between current assets and current liabilities by subtracting inventories and current prepaid assets.

Practical example

Company X has a balance sheet that looks like this:
Current assets
Account receivable$15,000
Marketable securities$5,000
Cash and cash equivalents$5,000
Inventory $5,000$100,000
Prepaid expenses$2,200
Total current assets$127,200
Current liabilities
Accounts payable$25,000
Accrued expenses$10,000
Other short-term liabilities$2,500
Total current liabilities$37,500

Company X’s total current assets include inventory and prepaid expenses, which also are not part of the quick ratio. However, the quick assets are separately identified, so we can calculate the quick ratio using the extended formula for our calculator:

Quick \;Ratio=\frac{C+CE+MS+AR}{CL}
Quick \; Ratio=\frac{(15,000+5,000+5,000)}{37,500}=0,67

Where MS are marketable securities and AR is account receivable. Final result is 0,67.

FAQ

What is meant by quick ratio?

The quick ratio, often referred such as the acid-test ratio, evaluates a firm’s ability to pay all its outstanding liabilities using just cash-generating assets when they become due.

How Do the Quick and Current Ratios Differ?

Because the quick ratio considers fewer things, it is more cautious than the current ratio.

What is a good quick ratio rate?

Any figure greater than 1.0 is a good quick ratio. A quick ratio of 1.0 or higher indicates that your company is healthy and capable of meeting its obligations. The higher the number, the better for your company.

What does a quick ratio of 0.9 mean?

First, this indicates that its existing assets are insufficient to cover the required payments on its current liabilities.

What causes the quick ratio to decrease?

In general, a low or declining ratio means that:
-firstly, if the company has taken on too much debt;
-secondly, if company’s sales are decreasing;
-thirdly, if the company is struggling to collect accounts receivable;
-and finally, if the company is paying its bills too quickly;

What is a bad acid test ratio?

The range of allowable acid test ratios varies by sector.
But, the acid-test ratio needs to be more than one in most sectors. If less than one, the company doesn’t have enough liquid assets to cover its existing liabilities, and therefore should be avoided. If the acid-test ratio is significantly lower than the actual ratio, net assets heavily rely on inventories. Also, if your acid test ratio is below one, it generally means that your firm does not have enough accessible assets to cover its present creditors.