Quick Ratio (Acid-Test) Calculator
Quick Ratio (Acid-Test) Calculator
The quick ratio refines the current ratio by removing inventory from the numerator, since inventory can be slow or uncertain to convert to cash (unlike cash, marketable securities, or receivables). This gives a more conservative view of a company's ability to pay short-term debts immediately.
Analysts and lenders favor this ratio over the plain current ratio for companies where inventory is illiquid, seasonal, or hard to value quickly.
- Formula: Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities.
- Rule of thumb: a quick ratio of 1.0 or above is generally considered healthy — it means the company could cover all short-term liabilities without selling any inventory.
- Why exclude inventory? Unlike cash or receivables, inventory must first be sold (and collected on, if sold on credit) before it becomes cash — a process that can take weeks or months.
How is the quick ratio different from the current ratio?
The current ratio includes all current assets (including inventory); the quick ratio excludes inventory, giving a stricter, more immediate picture of liquidity — useful when inventory is slow-moving or hard to liquidate quickly.
What if a company has no inventory at all (e.g. a service business)?
In that case the quick ratio and current ratio will be identical, since there is no inventory to subtract.
Quick Ratio (Acid-Test) Calculator
The quick ratio refines the current ratio by removing inventory from the numerator, since inventory can be slow or uncertain to convert to cash (unlike cash, marketable securities, or receivables). This gives a more conservative view of a company's ability to pay short-term debts immediately.
Analysts and lenders favor this ratio over the plain current ratio for companies where inventory is illiquid, seasonal, or hard to value quickly.
- Formula: Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities.
- Rule of thumb: a quick ratio of 1.0 or above is generally considered healthy — it means the company could cover all short-term liabilities without selling any inventory.
- Why exclude inventory? Unlike cash or receivables, inventory must first be sold (and collected on, if sold on credit) before it becomes cash — a process that can take weeks or months.
How is the quick ratio different from the current ratio?
The current ratio includes all current assets (including inventory); the quick ratio excludes inventory, giving a stricter, more immediate picture of liquidity — useful when inventory is slow-moving or hard to liquidate quickly.
What if a company has no inventory at all (e.g. a service business)?
In that case the quick ratio and current ratio will be identical, since there is no inventory to subtract.