Liquidity ratios are among the many financial ratios used to evaluate a business's financial health and performance. Specifically, they express the company’s ability to pay back short-term debt using current assets. Popular liquidity ratios include the quick ratio and current ratio.
The quick ratio, aka quick asset ratio or acid test, considers only highly liquid assets, like cash or securities. The company's financial statements have the information you need for thequick ratio calculation.
In this article, you will learn about the quick ratio and what it says about a company’s financial situation. You will also learn how to calculate the quick ratio in Google Sheets and interpret its value in the context of the company’s industry.
Quick Ratio Calculation
The quick ratio, or quick asset ratio, results from dividing quick assets by current liabilities. Quick assets are those that can be turned into cash quickly - within 90 days. The value of quick assets can be added using the balance sheet data. This is easy to set up in a template, using tools like Excel or Google Sheets. Remember to only include highly liquid assets like cash, accounts receivable, and marketable securities - no inventory or prepaid expenses.
Quick Ratio Formula
The quick ratio can be calculated using the following formula:
quick ratio = quick assets / current liabilities
If the value of quick assets is not directly available, you can always calculate it yourself from the data available on the balance sheet.
quick ratio = (cash + marketable securities + accounts receivable) / current liabilities
or
quick ratio = (current assets - (inventory + prepaid expenses) / current liabilities
What is a Good Quick Ratio?
A quick ratio above 1 is considered good, as this usually means current debt can be paid for using highly liquid assets, like cash and marketable securities. This makes creditors and investors happy, as it implies financial stability; current liabilities can be covered without having to sacrifice long-term assets.
What if the Quick Ratio is Less than 1?
A quick ratio below 1 usually means that the company could struggle to meet short-term obligations using quick assets. An unexpected setback could force the company to sell long-term assets to pay the short-term debt. However, they might find that long-term assets are harder to sell, particularly without incurring significant losses.
Within reason, the higher the ratio, the better: a ratio that is too high could indicate problems in the company’s management and accounting practices. Remember to get industry benchmarks to compare quick ratio values. Depending on various factors - like the type of industry and the size of the company - the acceptable top range of values may vary.
Quick Ratio vs Current Ratio
While the quick ratio focuses exclusively on highly liquid assets, the current ratio provides a broader view by considering all current assets. In other words, it expresses the company’s ability to cover its short-term liabilities within a year using current assets.
Quick Ratio Examples
If a company has quick assets valued at $85,000.00 and its current liabilities total $53,000.00, the quick ratio can be calculated as follows:
$85,000.00 / $53,000.00 = 1.603773585
A ratio of 1.6 would usually be considered very healthy.
However, if current assets are worth $53,000.00 and liabilities are $85,000.00:
$53,000.00 / $85,000.00 = 0.6235294118
A current ratio with a value of 0.62 is something that most investors would be concerned about, although there may be exceptions.
How to Calculate the Quick Ratio in Google Sheets?
Let’s say you want to calculate the quick ratio for Company A in Google Sheets. The company has the data shown below on the balance sheet.
You can download the Balance Sheet Template for free.
- 1. In an empty cell, type in the ‘=‘ sign and open the parenthesis. Add the cells with the values for the quick assets.
- 2. After closing the parenthesis, add the ‘/‘ sign and click on the cell with the value for total current liabilities.
- 3. Press “Enter” to get the quick ratio.
Conclusion
Now you know how to calculate the quick ratio using data found on the balance sheet. You also know how to add the formula directly in your spreadsheet and customize Layer’s Balance Sheet Template to include this ratio. As you’ve seen, Layer can help you automate this process by synchronizing data across different documents, scheduling data flows to update your templates in Excel or Google Sheets, and managing access and sharing with others.
The quick ratio is one of the various liquidity ratios available. While these ratios are generally good indicators of a company’s financial health, it’s important to interpret them in context and not rely on individual indicators. You can easily set up the formulas for multiple indicators in your spreadsheets To learn more about these, as well as other financial ratios and analyses, check out the articles below:
- Current Ratio
- Leverage Ratio
- Cost-Volume-Profit Analysis
- Profitability Analysis
- Budget Variance Analysis
