Quick Ratio (Acid-Test) Calculator
Calculate the quick ratio — the strictest measure of short-term liquidity.
Shows if a company can meet immediate obligations without selling inventory.
What Is the Quick Ratio?
The Quick Ratio — also known as the Acid-Test Ratio — is a stricter measure of liquidity than the current ratio. It answers the question: If all short-term obligations came due tomorrow, could the company pay them using only its most liquid assets?
The name “acid test” comes from the 19th-century gold rush: prospectors would pour nitric acid on a metal sample — if it dissolved, it was not gold. The ratio tests whether a company’s liquid assets are the “real thing.”
The Formula
Quick Ratio = (Cash + Short-term Investments + Accounts Receivable) / Current Liabilities
Or equivalently:
Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) / Current Liabilities
Why Exclude Inventory?
Inventory is excluded because it may not be quickly convertible to cash:
- Selling inventory takes time (production, shipping, payment terms)
- In a crisis, inventory may need to be sold at a steep discount
- Obsolete or slow-moving inventory may be worth far less than book value
This makes the quick ratio more conservative and often more informative than the current ratio for businesses with large or illiquid inventory.
How to Interpret the Quick Ratio
| Quick Ratio | Interpretation |
|---|---|
| Below 0.5 | Critical — very low immediate liquidity |
| 0.5 – 0.9 | Warning — may struggle to meet short-term obligations |
| 1.0 | Breakeven — liquid assets exactly equal current liabilities |
| 1.0 – 2.0 | Healthy — comfortable short-term position |
| Above 2.0 | Very strong — possibly holding excess uninvested cash |
When the Quick Ratio Matters Most
The quick ratio is especially important for:
- Retailers and manufacturers with large inventory balances
- Cyclical businesses where inventory value can fall sharply
- Credit analysis — lenders want to know you can repay even in bad times
- Distressed company analysis — during financial stress, only truly liquid assets matter
Quick Ratio vs. Current Ratio
If a company has a high current ratio but a low quick ratio, it means most of its current assets are tied up in inventory. This is a yellow flag — the company looks liquid on the surface, but its ability to pay debts quickly depends on selling goods first.
Worked Example
A retailer has: Cash $50,000, Short-term Investments $20,000, Accounts Receivable $80,000, Inventory $200,000, Current Liabilities $150,000.
- Quick Ratio = ($50,000 + $20,000 + $80,000) / $150,000 = 1.00 — exactly at breakeven
- Current Ratio = ($350,000) / $150,000 = 2.33 — looks strong, but only because of inventory