Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
 Ratio Analysis Advantages
 Ratio 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
 Current Ratio vs Quick Ratio
 Bid Ask Spread
 Liquidity vs Solvency
 Liquidity
 Solvency
 Solvency Ratios
 Liquidity Risk
 Altman Z Score
 Turnover Ratios
 Profitability Ratios
 Profitability Ratios Formula
 Profit Margin
 Gross Profit Margin Formula
 Operating Profit Margin Formula
 Operating Income Formula
 Net Profit Margin Formula
 EBIDTA Margin
 OIBDA
 Earnings Per Share
 Basic EPS
 Diluted EPS
 Basic EPS vs Diluted EPS
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)
 Return on Invested Capital (ROIC)
 ROIC vs ROCE
 ROE vs ROA
 CFROI
 Cash on Cash Return
 Return on Total Assets (ROA)
 Return on Average Capital Employed
 Capital employed Employed
 Return on Average Assets (ROAA)
 Return on Average Equity (ROAE)
 Return on Assets Formula
 Return on Equity Formula
 DuPont Formula
 Net Interest Margin Formula
 Earnings Per Share Formula
 Diluted EPS Formula
 Contribution Margin Formula
 Unit Contribution Margin
 Revenue Per Employee Ratio
 Operating Leverage
 EBIT vs EBITDA
 EBITDAR
 Capital Gains Yield
 Tax Equivalent Yield
 LTM Revenue
 Operating Expense Ratio Formula
 Overhead Ratio Formula
 Variable Costing Formula
 Capitalization Rate
 Cap Rate Formula
 Comparative Income Statement
 Capacity Utilization Rate Formula
 Total Expense Ratio Formula
 Efficiency Ratios
 Dividend Ratios
 Debt Ratios
 Debt to Equity Ratio
 Debt Coverage Ratio
 Debt Ratio
 Debt to Income Ratio Formula (DTI)
 Capital Gearing Ratio
 Capitalization Ratio
 Interest Coverage Ratio
 Times Interest Earned Ratio
 Debt Service Coverage Ratio (DSCR)
 Financial Leverage Ratio
 Financial Leverage Formula
 Net Debt Formula
 Leverage Ratios
 Operating Leverage vs Financial Leverage
 Current Yield
 Debt Yield Ratio
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
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
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
You can download this Quick ratio template here – Quick Ratio Excel template
Quick Ratio Formula Video
Recommended Articles
This has been a guide to Quick Ratio Formula, practical Quick Ratio Example, and Quick Ratio calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis –
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