How do you calculate the quick ratio from financial statements?

The quick ratio, also known as the acid-test ratio, is a financial metric used to assess a company's short-term liquidity and its ability to meet its immediate obligations without relying on the sale of inventory. It is a more stringent measure of liquidity compared to the current ratio because it excludes inventory from current assets, as inventory may not be as easily converted to cash in the short term. The quick ratio is calculated using the following formula:

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

Here's how to calculate the quick ratio using information from a company's financial statements:

1. Gather Financial Statements: Obtain the company's balance sheet or statement of financial position, which includes information about its assets and liabilities.

2. Identify Quick Assets:

   • Find the values of the following quick assets on the balance sheet:
     • Cash: The amount of cash the company has on hand.
     • Cash Equivalents: Highly liquid investments that are easily convertible to cash within 90 days or less. Examples include short-term government bonds and money market funds.
     • Marketable Securities: Investments that are readily marketable and expected to be converted to cash in the short term. These may include short-term bonds or stocks that can be sold quickly.
     • Accounts Receivable: The amounts owed to the company by its customers for goods or services delivered on credit.

3. Identify Current Liabilities:

   • Find the total value of current liabilities on the balance sheet. Current liabilities are obligations that the company expects to settle within the next year. Examples include accounts payable, short-term debt, and accrued expenses.

4. Calculate the Quick Ratio:

   • Add up the values of cash, cash equivalents, marketable securities, and accounts receivable.
   • Divide this sum by the total current liabilities.

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

The result is the quick ratio, which measures the company's ability to meet its short-term obligations using its most liquid assets. A higher quick ratio indicates better short-term liquidity and a lower reliance on inventory to meet obligations.

A generally acceptable quick ratio may vary by industry, but a quick ratio above 1.0 is often considered healthy, as it suggests that the company has enough liquid assets to cover its current liabilities. However, what constitutes a "good" quick ratio depends on the specific circumstances and industry benchmarks. It's important to interpret the quick ratio in the context of the company's financial situation and industry norms.

Quick ratio = quick assets / current liabilities

Quick assets = $100,000
Current liabilities = $50,000

Quick ratio = $100,000 / $50,000 = 2.0