Free Quick Ratio Calculator
Use the quick ratio to understand how liquid your business is by comparing the easy-to-convert assets you have to your current liabilities. The higher the quick ratio, the better your financial position in the eyes of creditors
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What is the Quick Ratio?
The quick ratio, sometimes called the acid-test ratio, is a useful financial metric. It's designed to help you understand your ability to meet short-term obligations without including your inventory in the calculations.
It’s a bit different from current ratio because the focus is on the most liquid assets. Things that can be turned to cash almost instantly.
How the Quick Ratio is Calculated
To calculate the quick ratio, you use this formula:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities
You'll notice that the calculation doesn't include invetory and other assets that cannot be quickly turned into cash - even if it would qualify under the current ratio calculation. Using this ratio provides more clarity about your ability to cover liabilities with liquid assets.
Benefits of the Quick Ratio
1. Shows True Liquidity
While the current ratio is useful, the quick ratio gives a clearer picture of your company’s true liquidity.
It includes inventory. Sometimes inventory can move quickly, sometimes it cannot move quickly. The only way to guarantee that inventory moves quickly is if you discount it. Quick ratio demonstrataes how prepared you are to handle your short term opbligations without selling your inventory.
2. Helps manage risk
The higher your quick ratio, the better financial footing your business has. Of course, other aspects can also impact your financial footing so use it as an approximation.
A good quick ratio means you have a bit of resilience and can tough out hard times because you're able to meet short term obligations. It also shows that you're unlikely to have clash flow issues that can damage your company.
3. Boosts Credibility with Investors and Lenders
A solid quick ratio builds confidence with investors and lenders.
They’ll see that you can handle your short-term obligations without needing to liquidate assets, which makes you a lower-risk investment or lending candidate.
The quick ratio gives you a more conservative look at your company’s liquidity by focusing only on the assets you can turn into cash quickly. It’s a valuable metric for managing risk, boosting financial credibility, and ensuring your business stays in a strong position to meet its obligations.
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