A quick ratio, commonly known as the acid test ratio, is a financial indicator to define the solvency of a company in the short run. And the quick ratio calculator provides assistance in measuring such solvency. It is comparatively better than the current ratio in various aspects. A current ratio compares cash and cash equivalents with inventory on the same platform. While quick ratio does not consider assets that are less liquid such as prepaid expenses and inventories.
Banks do look for a quick ratio with a current ratio as it gives an actual liquidity position of the company. A ratio of 1:1 is an ideal quick ratio. This implies that the company has enough quick current assets to pay off its current liabilities.
The quick ratio is a further narrowed-down version of the current ratio. And this pinpoints the instant liquidity status of the company. Moreover, it is a comparatively better appraisal metric to understand the cash and liability mismatch, if any.
By tweaking the current ratio, we can calculate the quick ratio. It is an easy-to-go formula if the values are already known.
- Current assets
- Current liabilities
- Bank overdraft
- Cash credit
- Prepaid expenses
Quick Ratio = Quick Current Assets / Quick Current Liabilities OR
Quick Ratio = Current Assets less inventories and all other non-cash equivalents / Quick current liabilities.
Quick Ratio Calculator
How to Calculate using Calculator?
The quick ratio calculator provides an effortless calculation with a simple click after entering the following data into it.
The only distinction between the quick asset and the current asset is for inventory and prepaid expenses. The distinction is because of the reason that inventory is less liquid in comparison to other components of a current asset like cash, short-term loans, debtors and bills receivables, marketable instruments, short-term securities, etc. Similarly, the prepaid expenses, as the term suggests, are the payments made in advance for some reason. We exclude these because we cannot reverse the payment and therefore are not liquid like the other quick assets.
The distinction between quick liabilities and current liabilities is of bank overdraft and cash credit. It is because they are secured by inventories. Therefore, quick current liabilities are current liabilities less the value of bank overdraft and cash credit.
To know more about interpreting and improving quick ratios, refer to the article: How to Analyze (Interpret) and Improve Quick Ratio?