What Is the Quick Ratio / Acid Test?
Learning how to calculate the quick ratio could be a great move. Find out more about the quick ratio / acid test ratio with our comprehensive guide. The quick ratio, which is also known as the acid test ratio, is a liquidity ratio that measures the ability of businesses to pay their current liabilities with quick assets. Its a great indicator of short-term liquidity, giving you an excellent insight into how your business would fare if it became necessary to quickly convert assets to pay for liabilities. Essentially, quick assets are current assets that could be converted to cash within 90 days or so. Marketable securities, cash equivalents, accounts receivable, and short-term investments are all considered to be quick assets. Put simply, the quick/acid test ratio measures the dollar amount of liquid assets against the dollar amount of current liabilities. How to calculate quick ratio  You can learn how to calculate the quick ratio by adding up all your companys quick assets and dividing by current liabilities. As a result, the quick ratio formula reads as follows:  Quick Ratio = Cash + Cash Equivalents + Marketable Securities + Accounts Receivable  You should be able to find all these components on your companys balance sheet, but its important to double-check when youre entering them into the formula. Only accounts receivable that can be collected within 90 days should be included. If you have accounts receivable that its not possible to collect within 90 days, ensure that these arent counted, or it could skew your result. Lets look at an example to see how this works in practice. Imagine Company As balance sheet reads as follows:  Cash and cash equivalents  $20,000  Short-term investments  $10,000  Receivables  $25,000  Current liabilities  $50,000  You could work out the quick/acid test ratio like this:  (20,000 + 10,000 + 25,000) / 50,000 = 1.1  This means that Company A can pay off all their current liabilities with their quick assets, and still have a small amount left over. Quick ratio / acid test ratio should always be analysed alongside other liquidity ratios, such as current ratio or cash ratio. Its also important to contextualise your businesss quick ratio by looking at the industry within which your company operates. If your business has a lower quick ratio than the industry average, it could indicate that it may have difficulty honouring its current debt obligations. However, a quick ratio thats much higher than the industry average isnt necessarily a sign of financial health, as it could indicate that the company has invested too heavily in low-return assets. Difference between current ratio and quick ratio  Although current ratio and quick ratio both measure a companys short-term liquidity, they do have several key differences that you should be aware of. Put simply, the quick ratio formula is more stringent than the current ratio, as the current ratio includes more items in its calculations (such as inventory and prepaid expenses). In short, the difference between current ratio and quick ratio is that quick ratio focuses on more liquid assets, rather than current assets that it may not be able to liquidate as quickly. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.