Quick Ratio (Acid-Test) Calculator
Calculate the quick ratio (acid-test ratio) — a stricter measure of short-term liquidity that excludes inventory and prepaid expenses from current assets.
Frequently Asked Questions
What is the quick ratio formula?
Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities. It is also called the "acid-test ratio" because, like a chemical acid test, it strips away anything that cannot be quickly and reliably converted to cash, leaving only the most liquid assets: cash, marketable securities, and receivables.
Why exclude inventory from the quick ratio?
Inventory can take weeks or months to sell, and in a cash crunch it may only fetch a fraction of its book value through a fire sale. Excluding it gives a more conservative, realistic view of whether a company could cover its short-term liabilities right now without relying on selling stock.
What is a good quick ratio?
A quick ratio of 1.0 or higher generally means a company can cover its current liabilities without selling inventory or raising new financing. Below 1.0 isn't automatically alarming — it depends on the business model and how quickly receivables turn into cash — but it does mean any short-term cash crunch would need attention. Above 2.0 may suggest the company is sitting on excess idle assets that could be put to better use.
How is the quick ratio different from the current ratio?
The current ratio = Current Assets ÷ Current Liabilities, including inventory and prepaid expenses. The quick ratio is always equal to or lower than the current ratio because it removes the least liquid current assets. A large gap between the two ratios usually means a company is holding a lot of inventory relative to its other current assets — common in retail and manufacturing.
Why do retailers typically have lower quick ratios?
Retail and manufacturing businesses naturally carry large inventories as a core part of operations, which inflates the current ratio but is excluded from the quick ratio. A retailer with a quick ratio of 0.5 isn't necessarily in trouble — compare it against other retailers, not against a software company with almost no inventory at all.
How can a business improve its quick ratio?
Collect receivables faster (tighter credit terms, early-payment discounts), delay non-critical payables within agreed terms, convert excess cash-equivalent investments into more liquid forms, or pay down short-term debt with longer-term financing to shrink current liabilities relative to quick assets.