How to Calculate Quick Ratio – Formula, Examples & Free Quick Ratio Calculator

A business might look rich on paper, but if its money is stuck in unsold inventory, it cannot pay the bills. That is a dangerous position to be in. Banks and investors know this. That is why they do not just look at your total assets. They demand a stricter test: the Quick Ratio (also called the Acid-Test Ratio).

This ratio ignores slow things like inventory and focuses only on speed. It asks one tough question: “If sales stopped today, could you pay off your immediate debts using only the cash you have right now?”

This rule applies everywhere—from the USA to Europe. The math is the same no matter where you do business.

In this guide, we will cover exactly how to calculate quick ratio, how to interpret the numbers, and how to use our free Quick Ratio Calculator to benchmark your business against global standards.

The Quick Ratio is a conservative liquidity metric that measures a company’s ability to pay its short term liabilities using its most liquid assets.

It is often called the Acid-Test Ratio. This name comes from historical metal assaying, where acid was used to test gold. If the metal didn’t corrode, it was real gold. Similarly, if a company has a strong quick ratio, its financial health is solid, regardless of how much inventory it has sitting in the warehouse.

The “Quick Assets” Difference

To understand how to calculate quick ratio correctly, you must know what counts as a “Quick Asset.”

• Included: Cash, Bank Balances, Marketable Securities, and Accounts Receivable (money customers owe you).
• Excluded: Inventory and Prepaid Expenses.

Why exclude inventory? Because you cannot pay a tax bill with a warehouse full of unsold t-shirts. You have to sell them first, which takes time.

You might wonder why we need this if we already have the Current Ratio.

According to Harvard Business School Online, the quick ratio provides a stricter view of liquidity because it excludes assets that cannot be quickly converted into cash, making it far more reliable in short-term financial analysis.

Here is why learning how to calculate quick ratio is mandatory for serious business analysis:

1. Exposes Inventory Bloat: A company might have a massive Current Ratio of 3.0, but if 90% of that is unsold inventory, they are cash-poor. The quick ratio reveals this instantly.
2. Worst-Case Scenario Testing: It simulates a “stress test” where the company cannot rely on new sales to pay bills.
3. Critical for Lenders: Banks often view this as the true measure of solvency. A ratio below 1.0 (where liabilities exceed liquid cash) often triggers higher interest rates on business loans.

The math behind the acid test ratio formula is straightforward. You are essentially stripping away the “slow” assets from your total.

Our tool is designed to be flexible—it supports both the Simple Mode (for quick estimates) and Detailed Mode (for precise breakdowns).

Method 1: The Core Formula (Detailed Mode) Use this if you have a specific breakdown of your liquid assets.

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities

Method 2: The Subtraction Formula (Simple Mode) Use this if you only have the total assets figure.

Quick Ratio = (Total Current Assets – Inventory – Prepaid Expenses) ÷ Current Liabilities

To master how to calculate quick ratio, you need to be strict about your inputs.

✅ The Quick Assets (Numerator)

• Cash & Equivalents: Physical currency and bank balances.
• Marketable Securities: Stocks or bonds that can be liquidated in days.
• Accounts Receivable (AR): Invoices owed by customers (assuming they are collectible).

❌ The Exclusions

• Inventory: Raw materials, work-in-progress, and finished goods.
• Prepaid Expenses: Insurance or rent paid in advance (you can’t use this to pay a new debt).

📉 Current Liabilities (Denominator)

• Accounts Payable: Money owed to suppliers.
• Short-Term Debt: Loans and credit lines due within one year.
• Accrued Liabilities: Wages, taxes, and utilities owed.

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If you want to perform a quick ratio calculation manually before using the tool, here is the standard procedure used in liquidity analysis.

Step 1: Sum Your Liquid Assets

Add up Cash, Securities, and Receivables. Alternatively, take Total Current Assets and subtract Inventory.

• Example: Total Assets ($200k) – Inventory ($100k) = $100,000 Liquid Assets.

Step 2: Sum Total Current Liabilities

Add up Payables, Loans, and Credit Card debt.

• Example: Payables ($40k) + Loan ($10k) = $50,000 Liabilities.

Step 3: Divide

Divide the result from Step 1 by Step 2.

• $100,000 / $50,000 = 2.0

Step 4: Compare Against Benchmarks

A result of 2.0 means you have $2.00 of instant cash for every $1.00 of debt. This is excellent. However, if this were a grocery store, a result of 0.4 might be normal.

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To truly understand how to calculate quick ratio in the real world, let’s look at three scenarios using our quick ratio calculator logic.

Example A: The Clothing Retailer (High Inventory)

Industry Context: Retailers often have huge amounts of money tied up in clothes on the shelf. This “Inventory” is counted in Total Assets but must be excluded for the Quick Ratio.

• Total Current Assets: $120,000
• Inventory: $100,000 (Excluded from Quick Assets)
• Current Liabilities: $50,000

Calculation: ($120,000 Total – $100,000 Inventory) ÷ $50,000 = 0.40

• Verdict: Healthy
• Target Range: 0.3 – 0.8
• Interpretation: In the retail sector, a ratio of 0.40 is considered healthy. Because retailers turn inventory into cash quickly, they don’t need to hold as much liquid cash as other industries.

Example B: The Software Company (SaaS)

Industry Context: Tech companies are the opposite of retail—they have almost no inventory. Their “Total Assets” are almost entirely cash.

• Total Current Assets: $200,000
• Inventory: $0 (Nothing to exclude)
• Current Liabilities: $100,000

Calculation: ($200,000 Total – $0 Inventory) ÷ $100,000 = 2.00

• Verdict: Very Strong
• Target Range: 1.0 – 1.8
• Interpretation: A ratio of 2.0 exceeds the standard tech benchmark of 1.8. It shows the company can pay off all its short-term debts twice over without needing to sell a single asset. This signals extreme financial stability.

Example C: The Construction Firm

Industry Context: Construction companies hold some inventory (raw materials like timber/steel) but also have large piles of cash from project deposits.

• Total Current Assets: $160,000
• Inventory: $50,000 (Excluded from Quick Assets)
• Current Liabilities: $100,000

Calculation: ($160,000 Total – $50,000 Inventory) ÷ $100,000 = 1.10

• Verdict: Healthy
• Target Range: 1.1 – 2.0
• Interpretation: A ratio of 1.10 falls exactly on the starting line of the healthy zone for construction. While acceptable, it leaves little room for error. If a client delays payment, the ratio could drop into the risk zone (< 1.1).

Example D: The Tech Startup (Detailed Breakdown)

Industry Context: Sometimes you don’t have the “Total Assets” figure ready and need to add up individual accounts. In this scenario, we look at a startup burning cash too quickly by summing up specific line items.

1. Liquid Assets:

• Cash & Equivalents: $30,000
• Marketable Securities: $10,000
• Accounts Receivable: $45,000
• Total Quick Assets: $85,000

2. Current Liabilities:

• Accounts Payable: $40,000
• Short-Term Debt: $50,000
• Accrued Liabilities: $15,000
• Total Current Liabilities: $105,000

Calculation: $85,000 ÷ $105,000 = 0.81

• Verdict: Risk Zone
• Target Range: 1.0 – 1.8
• Interpretation: This company has a Quick Ratio of 0.81, which is below the standard Tech minimum of 1.0. This is a warning sign. It means they only have 81 cents in liquid cash for every $1.00 of debt due this year. Unless they raise capital or speed up collections from customers, they may face a liquidity crisis.

We have built a robust quick ratio calculator designed for global business liquidity analysis. Whether you are analyzing a balance sheet in London, Auckland, or New York, this tool adapts to your needs.

1. Configure Your Settings

At the top, select your Currency ($, €, ₹, £).

• Why? This formats your report and charts with the correct regional symbol.
• The tool handles the formatting (e.g., 1,000.00) automatically.

2. Choose Your Industry

Click the “Industry Benchmark” dropdown. Select your sector (e.g., “Retail” or “Technology”).

• Smart Feature: This automatically updates the “Target” range logic. For example, selecting “Energy” lowers the safe target to 0.4–0.9, while selecting “Services” raises it to 1.1–2.0.

3. Choose Your Input Mode

• Simple Mode: Ideal if you only have the main totals. Enter “Total Current Assets,” “Inventory,” and “Total Liabilities.” The calculator will automatically subtract the inventory for you.
• Detailed Mode: Use this if you want to input line items like “Cash,” “Marketable Securities,” and “Accounts Payable” individually.

4. Click “Calculate”

The tool will instantly display:

• Your Quick Ratio: (e.g., 0.85)
• Status Badge: Risk, Healthy, or Excellent based on your specific industry.
• Asset Composition Chart: A visual breakdown showing how much of your assets are liquid vs. locked in inventory.

Knowing how to calculate quick ratio is only half the battle. You must know what the number implies for your business liquidity analysis.

Under 1.0 (Liquidity Squeeze)

You have less than $1.00 in liquid cash for every $1.00 of debt.

• Implication: You are relying on selling inventory to pay bills. If sales slow down, you may default.
• Note: This is normal for Retail and Grocery stores.

1.0 (The Break-Even)

You have exactly enough cash and liquid assets to pay off all short-term debts.

• Implication: You are solvent, but there is no safety buffer.

Over 1.0 (Healthy Liquidity)

You have more cash than debt.

• Implication: This is the goal for most industries (Manufacturing, Construction, Services). It shows financial stability.

Over 3.0 (Inefficient Cash)

While safe, a ratio this high might mean you are hoarding cash in the bank instead of investing it back into business growth.

One of the most common questions is: “What is a good quick ratio for my specific business?”

A software company and a factory should not have the same target. The table below outlines the approximate globally accepted ranges used by our calculator logic.

These are the approximate benchmark ranges commonly referenced by analysts, lenders, and investors across major industries.

Industry	Correct Global Range	Evidence & Notes
General Business (Mixed)	0.8 – 1.5	Standard global range across industries.
Retail	0.3 – 0.8	Walmart, Target, Costco typically 0.2–0.5. Very inventory-heavy.
Manufacturing	0.7 – 1.3	Good and widely accepted.
Services / Consulting	1.1 – 2.0	No inventory, but receivables-heavy. 2.5 is unrealistic for most.
Technology / SaaS	1.0 – 1.8	Big tech ≈ 1.2–1.6. Only cash-rich startups reach >2.0. DeepSeek’s 2.5 is too high.
Hospitals (Healthcare Providers)	0.5 – 1.0	Insurance reimbursements cause slow receivables.
Pharma / Biotech	1.0 – 2.0	Strong cash, consistent globally.
Energy & Utilities	0.4 – 0.9	Very stable regulated cash → low quick ratio acceptable.
Transportation / Logistics	0.7 – 1.3	Industry standard globally.
Construction / Real Estate	1.1 – 2.0	Project-based → requires liquidity.
Food & Beverage	0.5 – 1.0	Inventory-heavy, low margins.
E-commerce	0.7 – 1.3	Slightly better liquidity than offline retail.
Telecom	0.3 – 0.7	Subscription-based, stable cash, low quick ratio.
Agriculture / Farming	0.4 – 1.0	Highly seasonal working capital.
Mining & Metals	0.7 – 1.3	Capital-heavy ➝ moderate quick ratio.
Automotive	0.6 – 1.0	GM, Ford, Toyota all fall here.
Financial Institutions	N/A	Use LCR, NSFR, not quick ratio.
Other / Not Listed	1.0 – 1.5	Global default safety standard.

Important Notes About These Benchmarks

• These ranges are approximate, not absolute. Liquidity norms vary by region, company size, and business model.
• A low quick ratio is not always bad (e.g., Retail, Grocery, Telecom). A high quick ratio is not always good (e.g., hoarding cash instead of investing).
• Always compare your ratio with industry peers, not with unrelated sectors.
• Seasonal industries (Agriculture, Construction, E-commerce) may show large fluctuations quarter-to-quarter.
• Financial institutions (banks, NBFCs, insurance companies) do not use the quick ratio — they follow LCR, NSFR, and other Basel liquidity standards.

When learning how to calculate quick ratio, it helps to compare it to its cousin.

Feature	Current Ratio	Quick Ratio (Acid-Test)
Formula	Current Assets / Current Liab.	(Current Assets – Inventory) / Current Liab.
Includes Inventory?	Yes	No
Stringency	Lenient	Strict
Best For	General Health Check	Solvency & Crisis Planning

The “Yacht” Example (Why Quick Ratio Matters More)

Imagine a luxury boat dealership with $10 million in total current assets.
But here’s the catch: $9 million of that is tied up in expensive yachts sitting in the dock.

These yachts are valuable, but they are slow-moving inventory—they don’t convert to cash quickly.

So here’s what happens:

• Total Current Assets: $10,000,000
• Inventory (Yachts): $9,000,000
• Truly Liquid Assets: Only $1,000,000
• Current Liabilities: $500,000

Current Ratio:
10,000,000 ÷ 500,000 = 20.0
Looks extremely strong on paper.

Quick Ratio:
(10,000,000 – 9,000,000) ÷ 500,000 = 2.0
Still strong, but significantly lower.

Now imagine the dealer receives a $500,000 tax bill due tomorrow.
They can’t sell a yacht overnight, and banks won’t lend based on slow-moving inventory.

This is why the quick ratio is so powerful—it cuts through the illusion of inflated inventory and shows actual cash survival capacity.

Understanding how to calculate quick ratio gives you “X-ray vision” into the true liquidity of a business. It strips away the fluff (inventory) and looks strictly at the cash ability to survive.

• The Formula: (Current Assets – Inventory) / Current Liabilities.
• The Goal: Aim for 1.0+ for most industries (excluding retail).
• The Tool: Use our quick ratio calculator above to check your liquidity status instantly.

If you’re analyzing business liquidity and profitability, these calculators can help you go deeper into financial health and performance:

• Current Ratio Calculator
  Measure overall short term solvency by comparing total current assets with current liabilities.
• Gross Margin & Marginal Revenue Calculator
  Understand how efficiently your business generates profit from sales and how additional revenue impacts margins.
• Operating Income Calculator
  Evaluate core business profitability by calculating income from operations before interest and taxes.

Using these tools together gives a more complete picture of liquidity, profitability, and operational strength—beyond just the quick ratio.

The information provided in this article and via the calculator is for educational purposes only and does not constitute professional financial advice. Always consult with a qualified accountant or financial advisor regarding your specific business situation.