Answers the Question
How bad is a company's liquidity?
Calculator for Quick Ratio
What Is the Quick Ratio?
The quick ratio (also known as the acid-test ratio) is just what it sounds like, a fast (yet imperfect) means of estimating the financial health of a company.
Most healthy firms should have a ratio value of one or greater, but the norms depend upon industry.
Values that are less than one are found in companies that will have trouble meeting their short-term obligations. Larger values above one tend to be seen as signs of financial strength.
Why Is it Important?
- This number presents useful insight into the health of a company without requiring much in the way of complex mathematics.
- This number is often used for the purposes of investing, but it may also have nefarious uses as well. Buyers with access to this type of information can use it as a means of estimating how desperate a firm is for injections of cash. Vendors who have poor quick ratios may be willing (or even forced) to accept lower prices, if the terms of payment include prompt payment.
Formula(s) to Calculate Quick Ratio
- QUICK RATIO = (CASH AND EQUIVALENTS + MARKETABLE SECURITIES + ACCOUNTS RECEIVABLE) / CURRENT LIABILITIES
- Some analysts will attempt to include the value of inventory into the equation, in order to make their quick ratio look better than it should be. Inventory should not be included.
- Many investors believe that higher values are always better, but this is not necessarily the case. Values that are too high may depict companies that have under-invested their wealth in productive capital-generating assets.
- Some analysts may fudge the numbers for current receivables, by including receivables that are unlikely to be collected in order to increase the value of the quick ratio.