Financial Statement Analysis
 Liquidity Ratios
 Cash Ratio
 Cash Ratio Formula
 Quick Ratio
 Quick Ratio Formula
 Current Ratio
 Current Ratio Formula
 Acid Test Ratio Formula
 Defensive Interval Ratio
 Working Capital Ratio
 Working Capital Formula
 Net Working Capital Formula
 Changes in Net Working Capital
 Change in Net Working Capital (NWC) Formula
 Cash Flow from Operations Ratio
 Cash Flow Per Share
 Cash Reserve Ratio
 Operating Cycle Formula
 Current Ratio vs Quick Ratio
 Bid Ask Spread
 Liquidity vs Solvency
 Liquidity
 Accounting Liquidity
 Solvency
 Solvency Ratios
 Equity Ratio
 Capital Adequacy Ratio
 Cash Reserve Ratio Formula
 Liquidity Risk
 Altman Z Score
 Ratio Analysis (17+)
 Turnover Ratios (17+)
 Profitability Ratios (66+)
 Efficiency Ratios (7+)
 Dividend Ratios (9+)
 Debt Ratios (26+)
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Quick Ratio Formula
Quick Ratio Formula or Acid Test Ratio is one of the most important Liquidity Ratios for determining the company’s ability to pay off its current liabilities in the short term.
It goes by the formula of Quick Ratio.
OR
In case company is not giving breakup of Quick Assets, then:
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Quick Ratio Example
You can consider the following example for better understanding of Quick Ratio:
Masters Co. Ltd has following details:
Current Assets:
 Cash = $200,000
 Advance = $30,000
 Marketable Securities = $60,000
 Account Receivables = $40,000
 Inventories = $80,000
Total Current Assets = $410,000
Current Liabilities:
 Account Payable = $260,000,
 Accrual Expenses = $30,000,
 Shortterm Debt = $90,000,
 Interest Payable = $60,000.
Total Current Liabilities = $440,000.
Previous years acid test ratio was 1.4 and the industry average is 1.7
4.9 (1,067 ratings)
Calculation of acid test ratio formula:
Acid test ratio formula = (Cash + Shortterm marketable securities + A/c’s Receivable) / Current Liabilities
= ($200,000 + $60,000 + $40,000) / ($440,000)
= ($300,000) / ($440,000)
= 0.68
Explanation of Quick Ratio Formula
The Quick Ratio formula is a more stringent measure of shortterm liquidity as compared to Current Ratio. Quick Assets are the ones which can be converted to cash in short term or in a period of 90 days. The important difference between Current Ratio formula and Acid Test Ratio formula is that we are excluding Inventory & Prepaid Expenses as a part of Current Assets in Quick Ratio formula.
Inventory is excluded because it is assumed that the stock held by the company may not be realized immediately. The inventory could be in the form of Raw materials or WIP. Such a situation will make the process of liquidating the inventory all the more tricky and timeconsuming.
An acid test ratio of 1 or more indicates that the company can pay off its current liabilities with the help of Quick Assets, and without needing to sale of its longterm assets and has sound financial health. Care must be exercised in placing too much reliance on acid test ratio without further investigating; For e.g.: Seasonal businesses, which seek to stabilize production, might have a weak Quick ratio formula during its period of slack sales, but a higher one in case of its peak business season. Such situations may prove tricky to know the actual financial position of the company.
Use of Quick Ratio Formula
 Keeping track of Quick ratio formula helps the management to determine whether they are maintaining optimum levels of Quick assets so as to take care of its short term liabilities in their balance sheets.
 Quick Ratio formula showcases a wellfunctioning shortterm financial cycle of a company.
 This improves the credibility of the company with the investors by gaining and maintaining their trust in the value of their investments.
 Also the creditors of the company know that their payments will be made on time.
Microsoft Acid Test Ratio Example
Let’s now look at the example of Microsoft acid test ratio.
As noted from the below graph, Cash Ratio of Microsoft is a low 0.110x, however, its acid test ratio is a massive 2.216x.
source: ycharts
Microsoft acid test ratio is pretty high primarily due to shortterm investments of around $106.73 billion! This puts Microsoft in a very comfortable position from the point of view of liquidity / Solvency.
source: Microsoft SEC Filings
Interpretation of Acid Test Ratio
 As per previous year, the company had an acid test ratio of 1.4, whereas this time it amounts to 0.68.
 From this, we can figure out that the company has not maintained enough Quick assets to pay off its current liabilities. It shows that the company will face potential liquidity problems.
 It might have to sell off its longterm assets to pay off its liabilities if needed, which is not a sign of a healthy and wellmanaged balance sheet.
 The company should maintain the acid test ratio to at least 1, which is considered ideal and satisfactory.
Quick Ratio Calculator
You can use the following Quick Ratio Calculator
Cash  
Shortterm marketable securities  
A/c’s Receivable  
Current Liabilities  
Quick Ratio =  
Quick Ratio = 



Quick Ratio in Excel (with excel template)
Let us now do the same Quick Ratio example above in Excel.
This is very simple. You need to provide the two inputs of Total Current Assets and Total Current Liabilities.
You can easily calculate the ratio in the template provided.
Calculation of acid test ratio
Acid test ratio = (Cash + Shortterm marketable securities + A/c’s Receivable) / Current Liabilities
Quick Ratio Formula Video
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