# What is a Good Quick Ratio & How Is It Calculated?

By Intrinio
October 24, 2023

Understanding a company's financial health is crucial for making informed investment decisions. One of the key metrics used to assess a company's short-term liquidity and ability to meet its immediate financial obligations is the quick ratio. In this article, we will delve into the concept of the quick ratio, explore its importance, compare it to the current ratio, learn how to calculate it, provide a practical computation example, and discuss where you can find quick ratio data with the support of data providers like Intrinio.

## What is a Quick Ratio?

The quick ratio, often referred to as the acid-test ratio, is a financial metric that measures a company's ability to pay its short-term liabilities using its most liquid assets. These liquid assets typically include cash, cash equivalents, and marketable securities, as well as accounts receivable that can be quickly converted into cash. The quick ratio provides insight into a company's ability to cover its immediate financial obligations without relying on the sale of inventory or long-term assets.

### Quick Ratio vs. Current Ratio

While both the quick ratio and the current ratio assess a company's liquidity, they do so in slightly different ways. The key distinction lies in the assets included in the calculation:

• Quick Ratio: This ratio considers only the most liquid assets, excluding inventory. The formula is designed to provide a conservative estimate of a company's ability to meet short-term obligations without relying on the sale of inventory.
• Current Ratio: The current ratio, on the other hand, includes all current assets, including inventory. It provides a broader view of a company's liquidity but may overstate its ability to pay short-term debts, as inventory may not be as readily convertible to cash.

### Importance of Quick Ratio

The quick ratio is a critical indicator for both investors and creditors because it assesses a company's immediate financial strength. Here's why it is essential:

• Assessment of Liquidity: The quick ratio offers a snapshot of a company's liquidity and its capacity to settle short-term liabilities promptly.
• Creditor Confidence: Creditors, such as suppliers and lenders, use the quick ratio to gauge whether a company can meet its obligations. A higher quick ratio may instill greater confidence in creditors.
• Investor Insight: Investors use the quick ratio to evaluate a company's financial health. A low quick ratio may indicate potential financial stress, while a high ratio suggests a strong position.
• Comparative Analysis: Investors and analysts often use the quick ratio to compare companies within the same industry. It provides a basis for evaluating liquidity relative to industry norms.

## Formula for Quick Ratio

The formula for calculating the quick ratio is straightforward:

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

• Cash: The company's physical cash on hand.
• Cash Equivalents: Highly liquid investments that can be converted into cash quickly. Examples include Treasury bills and money market funds.
• Marketable Securities: Short-term investments that can be easily converted into cash at their market value.
• Accounts Receivable: The outstanding payments owed to the company by its customers. It includes amounts that are expected to be collected within the short term.
• Current Liabilities: Short-term obligations that the company is required to settle within the next year, such as accounts payable, short-term debt, and accrued expenses.

## Quick Ratio Computation Example

Let's walk through a quick ratio computation example to illustrate how the formula works.

### Suppose Company ABC has the following financial information:

• Cash: \$50,000
• Cash Equivalents: \$20,000
• Marketable Securities: \$30,000
• Accounts Receivable: \$40,000
• Current Liabilities: \$90,000

### Using the quick ratio formula:

Quick Ratio = (\$50,000 + \$20,000 + \$30,000 + \$40,000) / \$90,000

Quick Ratio = \$140,000 / \$90,000

Quick Ratio = 1.56

In this example, Company ABC has a quick ratio of 1.56, indicating that it has \$1.56 in highly liquid assets available to cover each dollar of short-term liabilities.

## Where to Find Quick Ratio Data

When it comes to accessing financial data, including quick ratios, reliable sources are essential. One such source is Intrinio, a trusted provider of financial data that offers a comprehensive platform for accessing a wide range of financial metrics, including quick ratios, for publicly traded companies. The good news? We calculate it for you!

You can access quick ratio data through Intrinio’s US Fundamentals product. This data feed also comes with a host of profitability metrics, ratios, and a full set of financial statement data. It’s available via API or CSV download, and comes fully supported with great resourced, documentation, and customer support. This makes it especially useful for any fintech developers who can quickly and easily display quick ratio data in their apps in a visually appealing way.

By leveraging Intrinio's US Fundamentals and Quick Ratio data, investors, analysts, and financial professionals can access accurate and up-to-date financial information to assess a company's financial health, conduct comparative analyses, and make informed investment decisions.

Intrinio's platform offers a user-friendly interface, customizable data feeds, and robust analytics tools that empower users to delve deeper into financial data and ratios like the quick ratio. Whether you are evaluating a single company or conducting industry-wide research, Intrinio provides the data solutions you need to gain valuable insights into liquidity and financial strength.

In conclusion, the quick ratio is a valuable financial metric that assesses a company's ability to meet short-term obligations using its most liquid assets. It plays a crucial role in creditor assessments, investor decision-making, and industry comparisons. By understanding the quick ratio, how to calculate it, and where to access reliable data, you can make more informed financial judgments and navigate the complex world of investing with confidence. When it comes to accessing financial data, platforms like Intrinio offer the tools and resources you need to stay informed and make data-driven decisions in today's dynamic financial landscape.

No items found.