Quick Ratio Calculator: Acid-Test Ratio

The current ratio includes all current assets, including inventory and prepaid expenses. The quick ratio (acid-test) strips out inventory and other less-liquid items, keeping only cash, short-term investments, and net receivables. The quick ratio is a more conservative test of liquidity because it excludes assets that may take weeks or months to convert to cash.

Quick assets are cash and cash equivalents, short-term marketable investments (treasury bills, money market funds), and net accounts receivable (after deducting the allowance for doubtful accounts). Inventory, prepaid expenses, and other current assets are excluded because they are not immediately convertible to cash at full book value.

A quick ratio of 1.0 or above is generally considered adequate: the company can cover its current liabilities using only its most liquid assets. A ratio above 1.5 is considered strong. A ratio below 1.0 does not automatically indicate distress, particularly in industries where inventory turns over very rapidly, but it warrants monitoring alongside other liquidity indicators.

Yes, significantly. Technology and professional services companies often maintain quick ratios above 2.0 because they hold little inventory. Retailers and manufacturers commonly run quick ratios below 1.0 because their current assets are dominated by inventory. Banks use entirely different liquidity metrics (liquidity coverage ratio, net stable funding ratio) regulated under Basel III.

Common approaches include accelerating accounts receivable collections (shorter payment terms, early payment discounts), reducing current liabilities by refinancing short-term debt to long-term, converting excess inventory to cash through promotions or liquidation, and improving cash generation from operations. Artificially holding excess cash also raises the ratio but may reduce overall returns.