This **quick ratio calculator** estimates the acid test ratio by measuring the proportion of cash, temporary marketable securities & accounts receivable against current liabilities value. You can find the formulas applied below the form.

## How does this quick ratio calculator work?

The *quick ratio *(QR)is also known as* acid test ratio* and measures the liquidity of a company translated as its ability of paying in due time its short term debts.

This financial indicator requires to compare the value of the short-term assets (cash & near cash assets) to the one of short-term liabilities. Please take account of the fact that this ratio does not include into calculation the inventories because they are considered less liquid.

This *quick ratio calculator* has 2 tabs, each one offering a specific method to calculate the acid test ratio:

- By 1^{st} tab (Method 1) you can determine the quick ratio by finding the proportion of the cash, temporary marketable securities & account receivable against the figure of the current liabilities a company has:

**QR = (Cash value + Accounts Receivable + Marketable securities)/Current liabilities**

- By 2^{nd} tab (Method 2) you can estimate the ratio by comparing the current assets figure (minus inventory and prepayments) to the short term obligations of a business:

**QR = (Current assets – Inventory – Prepayments )/Current liabilities**

## The interpretation of the quick ratio level

Because it is a liquidity ratio, the larger (usually greater than 1) the quick ratio is the better since it indicates that the company in question has sufficient liquid assets to meet its immediate debts and obligations. However, a too high quick ratio (usually greater than 3.5 - 4) points out a too liquid position, which may indicate that the company being analyzed does not make use of its financial resources in an efficient manner in such a way to increase its revenues and/or profits and generate a higher rate of return.

More specifically a quick ratio of 1 (or 100%) demonstrates that the value of the most liquid assets an entity has equal to its obligations due in less than one year.

On the other hand, if the quick ratio is below 1 it may be interpreted as a signal of insolvency.

## Examples of QR calculations

Case 1:

Let's take the example of company “X” that has an amount of cash of $100,000, temporary marketable securities of $200,000, accounts receivable of $50,000 and short term liabilities of $150,000 and calculate its quick ratio:

QR = ($100,000 + $200,000 + $50,000)/$150,000 = 2.33 (or 233.33%)

Case 2:

Considering another example of a business that has current assets estimated to worth $500,000, inventory of $100,000, prepayments of $50,000 and current liabilities of $200,000, let’s discover the quick ratio value:

QR = ($500,000 – $100,000 - $50,000)/$200,000 = 1.75 (or 175.00%)

11 May, 2015 | 0 comments
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