Quick Ratio Calculator

The current ratio, minus the part you cannot sell quickly

Every liquidity ratio is asking the same nervous question. If the bills all landed at once, could you pay them?

The current ratio answers it generously. It takes everything you own that should turn into cash within a year and divides by everything you owe within a year. Fine, except it counts inventory, and inventory is the least dependable thing on that list. Stock that sells in a week is nearly cash. Stock that has been sitting since last season is a hopeful number in a spreadsheet.

So the quick ratio does the same sum with inventory taken out. Hence the other name it goes by, the acid test, borrowed from the old assay for real gold.

A result above 1 means you could clear your short term obligations without selling a single item of stock. Below 1 means you could not, and something would have to be sold, collected early, or borrowed.

Which sounds tidy. It is not, quite, because there is more than one version of this formula in the world and they do not all give the same answer.

There are three formulas in circulation

Open three finance textbooks and you can find three ways to write the quick ratio. Two of them agree with each other. The third does not.

The first two arrive at the same number by opposite routes. One names the assets it will accept, the other names the assets it will throw out, and on a normal balance sheet what remains is identical.

The third keeps prepaid expenses in. And that is the whole disagreement.

The argument for excluding prepayments is that they cannot pay anybody. Prepaid rent, prepaid insurance, an annual software licence paid in January. They are assets in the accounting sense, because you are owed a service, but you cannot hand your landlord next year's insurance policy. If the question is strictly what you could turn into cash to settle a bill, prepayments do not qualify.

The argument for keeping them is that they are already spent. Money that has left the building has also removed a future obligation, and it is unusual for a business to be undone by having paid its rent early.

Both positions are reasonable. What is not reasonable is quoting a quick ratio without saying which one you used, because the difference is not a rounding matter.

Which one this calculator runs

The simple subtraction version. Explicitly.

Quick ratio = (Current assets - Inventory) / Current liabilities

Three boxes, three figures straight off a balance sheet, and prepaid expenses stay in the numerator.

So our number will sit slightly above what a stricter source produces on the same accounts, and the gap is not random. It is exactly this:

Gap = Prepaid expenses / Current liabilities

Always, on any balance sheet. Which is a useful thing to know, because it means you can convert our answer to the strict one without recalculating anything. Take your prepaid expenses, divide by current liabilities, subtract.

If you would rather the calculator gave you the strict version directly, subtract prepaid expenses from your current assets figure before you type it in. Same three boxes, stricter answer.

The result is rounded to two decimal places, which is the convention everywhere, since a liquidity ratio quoted to four places is pretending to a precision the underlying accounts do not have.

One balance sheet, all three answers

Here is a small company's current section.

Enter 182,700, 48,000 and 91,400, and the calculator returns 1.47. That is 134,700 divided by 91,400.

Now run the other two by hand.

The first two land on exactly the same numerator, which is the point about them being the same test written two ways.

The gap between ours and theirs is 0.1061. And 9,700 divided by 91,400 is 0.1061. The prepaid expenses, to four decimal places.

For comparison, the current ratio on the same accounts is 182,700 over 91,400, which is exactly 2.00. So the three tests give 2.00, 1.47 and 1.37 on one unchanged balance sheet, and every one of those is a defensible answer to a slightly different question.

Reading the number you get

The rule of thumb everyone learns is that 1.0 is the line. Above it you can cover short term obligations from liquid assets, below it you cannot.

It is a decent starting point and a poor stopping point, for two reasons.

The right level depends entirely on the business. A supermarket runs on a quick ratio that would terrify a manufacturer, because it takes cash from customers today and pays suppliers in sixty days. Its inventory turns over in days and its receivables barely exist. A heavy engineering firm with nine month projects and long payment terms needs a far larger cushion for the same comfort. Comparing across industries tells you about the industries, not the companies.

Too high is also information. A quick ratio of four is not four times as safe as one. It usually means a large pile of cash doing nothing, which is a return problem rather than a liquidity one. Our return on assets calculator is where idle capital shows up as a cost.

So read it three ways. Against your own past quarters, where the trend matters more than the level. Against companies in the same business. And against the specific bills you actually have coming.

That last one is worth doing literally. The ratio treats all current liabilities as though they fall due at once, which they never do. If most of yours are ninety days out and most of your receivables land in thirty, a ratio below 1 may be entirely comfortable.

What a comfortable number can still hide

The quick ratio trusts receivables completely, and that is where a healthy looking number most often goes wrong.

Accounts receivable sit in the numerator at full face value whether they are thirty days old or three hundred. A company with 65,000 of receivables from prompt paying customers and a company with 65,000 owed by one struggling client score identically here. Some stricter formulations exclude receivables considered doubtful of collection for exactly this reason.

So before believing a quick ratio, age the receivables. If a large share is past ninety days, discount it in your head and run the number again with a smaller figure.

Two other things it cannot see. It is a photograph of one day, and balance sheet dates are often chosen to flatter, a habit old enough to have its own name in accounting. And it says nothing about whether the business is profitable, only whether it can pay this month.

A useful pairing: run the quick ratio for whether the bills get paid, and our return on equity calculator for whether the business is worth owning. Companies fail in both directions, and the two ratios watch different exits.

Questions people ask

How is this different from the current ratio?

The current ratio divides all current assets by current liabilities. The quick ratio removes inventory first, on the grounds that stock is the slowest current asset to turn into cash. On the worked example above the two are 2.00 and 1.47.

Should prepaid expenses be excluded?

Sources differ, which is the point of this page. This calculator keeps them in. To get the stricter figure, subtract prepaid expenses from current assets before entering, or subtract prepaid divided by current liabilities from the answer.

What is a good quick ratio?

Above 1.0 is the usual line, but the right level varies enormously by industry. Retail runs comfortably below it, project based manufacturing needs much more. Compare against similar businesses and against your own trend rather than against a universal number.

What about a business with no inventory at all?

For a service business the quick ratio and the current ratio converge, since there is no inventory to remove. In that case the current ratio is the more natural tool and gives the same answer.

Is a quick ratio below 1 a problem?

Not necessarily. It means liquid assets do not cover current liabilities on paper, which matters a great deal if the liabilities are due next week and rather less if they are due in three months while your receivables land in one.

Where do I find these figures?

On the balance sheet, in the current assets and current liabilities sections. For a listed company they are in the annual or quarterly filing. The classified balance sheet that separates current from non-current items is exactly what makes this ratio calculable.

Is the acid test ratio the same thing?

Yes, two names for one measure. Acid test is the older term, from the assay once used to check whether metal was really gold.

References

A note on why this page spends more time on definitions than on arithmetic. The formula is trivial, but the inputs are accounting categories, and the boundary between a current and a non-current item is set by reporting standards rather than by convention. In the United States, Regulation S-X requires registrants to present a classified balance sheet separating the two, and the accounting standards define both terms, which is what makes the ratio computable at all. The Securities and Exchange Commission's own guide for investors explains those categories in plain language and is the best starting point for anyone reading a balance sheet for the first time.

1. U.S. Securities and Exchange Commission, Beginners' Guide to Financial Statements, on assets, liabilities and shareholders' equity, and on current liabilities as obligations a company expects to pay within the year. https://www.sec.gov/about/reports-publications/investorpubsbegfinstmtguide
2. U.S. Securities and Exchange Commission, Beginners' guide to financial statements, Investor.gov glossary entry. https://www.investor.gov/introduction-investing/investing-basics/glossary/beginners-guide-financial-statement
3. U.S. Securities and Exchange Commission, Regulation S-X, Rule 5-02, requiring a classified balance sheet separately presenting current assets and current liabilities, which is the presentation this ratio depends on.
4. Brealey, R.A., Myers, S.C., and Allen, F., Principles of Corporate Finance, McGraw-Hill Education, chapters on financial statement analysis and liquidity measures.