Quick Ratio Calculator
What is Quick Ratio?
A Quick Ratio, also known as an acid-test ratio, is a fundamental indicator used in corporate finance to examine a company's liquidity. It's a measure of a company's capacity to cover its short-term obligations with its most liquid assets. Essentially, it allows us to determine if a company has sufficient resources to cover the responsibilities due within a year.
The calculation formula for a Quick Ratio, or acid-test ratio, is:
quick_ratio = (cash_and_cash_equivalent + marketable_securities + accounts_receivable) / current_liabilitiesHow to use Quick Ratio Calculator?
To effectively use a Quick Ratio Calculator, you should follow these steps:
Start by inspecting the financial statements of the company you're analyzing.
Locate the sections marked “Cash and Cash Equivalents”, “Investments in Financial assets due within one year" (also known as “Marketable securities”) and “Accounts Receivable” in the balance sheet's current assets.
In the liability section of the balance sheet, identify the "Current Liabilities". These include accounts payable, current income tax payable, current portion of loans payable, short-term provisions, and other current liabilities.
Input the appropriate values into the Quick Ratio Calculator to determine the quick ratio.
An actual example to demonstrate the calculator
To illustrate how this calculator works, let's assume:
"Cash and Cash Equivalents" of $40,000
"Marketable Securities" of $15,000
"Accounts Receivable" of $25,000
"Current Liabilities" of $50,000
We calculate as follows:
quick_ratio = (cash_and_cash_equivalent + marketable_securities + accounts_receivable) / current_liabilitiesquick_ratio = ($40,000 + $15,000 + $25,000) / $50,000 = 1.6
A quick ratio value of 1.6 indicates that the company has 1.6 times the liquid assets required to cover its current liabilities. The ideal quick ratio is 1.0 or higher. Thus, a value of 1.6 shows that the company is in good financial health with an ability to pay off its short-term obligations.