A quick ratio above 1, on this formula, means near-cash assets cover the amounts due inside a year. Below 1, they do not.
The SBA glossary lists cash, receivables, inventory, and other items that could convert to cash in less than one year as current assets. Amounts due within one year are current liabilities. An SEC computation of ratios exhibit writes the current ratio as current assets divided by current liabilities.
Quick ratio is the acid test on that same snapshot. Inventory comes out of the numerator. The quick ratio calculator does it this way:
Current assets = cash + receivables + inventory + other current assets
Current liabilities = accounts payable + other current liabilities
Quick assets = current assets − inventory
Quick ratio = quick assets ÷ current liabilities
Current ratio = current assets ÷ current liabilities
Working capital = current assets − current liabilities
The glossary and the SEC exhibit define the pieces. On this page, coverage means quick assets meet the liabilities you typed. Example 3 is a 2.5× current ratio with a 0.38× quick ratio, because almost all of the assets are inventory. Example 5 is under 1 on both tests.
The dollar cushion is the working capital calculator. The working capital post uses the same six lines and leads with the dollars. Months until cash hits zero are the cash runway calculator, walked in the runway post. How long inventory, receivables, and payables tie cash up is the cash conversion cycle.
These are snapshots from the balances you type. A lender still applies their own test.
Fig 1
Inventory leaves the numerator
The current ratio keeps it
Add the asset lines. Subtract inventory for quick assets. Divide by current liabilities.
What above 1 is checking
Quick assets larger than current liabilities produce a ratio above 1. The bills due inside a year could be paid from cash, receivables, and the other current assets, with inventory still on the shelf. A ratio of 1 means they match. A ratio under 1 means those near-cash lines are smaller than the bills.
Inventory can still be sold. The acid test refuses to count on that. A current ratio above 1 with a quick ratio below 1 is the case where the cover depends on selling stock. Example 3 is that case. Example 4 moves the same stock into cash and the two ratios meet.
Example 1: the calculator defaults
Inputs:
- cash: $40,000
- accounts receivable: $45,000
- inventory: $90,000
- other current assets: $5,000
- accounts payable: $35,000
- other current liabilities: $25,000
Current assets: 40,000 + 45,000 + 90,000 + 5,000 = $180,000.00
Current liabilities: 35,000 + 25,000 = $60,000.00
Quick assets: 180,000 − 90,000 = $90,000.00
Quick ratio: 90,000 ÷ 60,000 = 1.5×
Current ratio: 180,000 ÷ 60,000 = 3×
Working capital: 180,000 − 60,000 = $120,000.00
Calculator result
Quick ratio
- Cash and equivalents
- $40,000.00
- Accounts receivable
- $45,000.00
- Inventory
- $90,000.00
- Other current assets
- $5,000.00
- Accounts payable
- $35,000.00
- Other current liabilities
- $25,000.00
1.5×
quick ratio
- Quick assets
- $90,000.00
- Current ratio
- 3×
- Working capital
- $120,000.00
Near-cash covers the $60,000 by 1.5 times. Inventory is half the asset book, 90,000 ÷ 180,000 = 0.5, and it is why the current ratio is twice the quick ratio: 3 ÷ 1.5 = 2. The same snapshot is the default on the working capital page.
Example 2: a cafe with little stock
Inputs: cash $22,000, receivables $3,000, inventory $4,000, other assets $1,000, payables $8,000, other liabilities $6,000.
Current assets: 22,000 + 3,000 + 4,000 + 1,000 = $30,000.00
Current liabilities: 8,000 + 6,000 = $14,000.00
Quick assets: 30,000 − 4,000 = $26,000.00
Quick ratio: 26,000 ÷ 14,000 = 1.8571, shown as 1.86×
Current ratio: 30,000 ÷ 14,000 = 2.1429, shown as 2.14×
Working capital: 30,000 − 14,000 = $16,000.00
Inventory is 4,000 ÷ 30,000 = 13.3% of current assets. Pulling it out moves the ratio from 2.14× to 1.86×. Both sit above 1. The dollar cushion is $16,000, which is small next to Example 1’s $120,000 and still a cover on these bills.
Example 3: stock-heavy, and the quick ratio falls under 1
Inputs: cash $6,000, receivables $9,000, inventory $85,000, other assets $0, payables $28,000, other liabilities $12,000.
Current assets: 6,000 + 9,000 + 85,000 = $100,000.00
Current liabilities: 28,000 + 12,000 = $40,000.00
Quick assets: 100,000 − 85,000 = $15,000.00
Quick ratio: 15,000 ÷ 40,000 = 0.375, shown as 0.38×
Current ratio: 100,000 ÷ 40,000 = 2.5×
Working capital: 100,000 − 40,000 = $60,000.00
Calculator result
Quick ratio
- Cash and equivalents
- $6,000.00
- Accounts receivable
- $9,000.00
- Inventory
- $85,000.00
- Other current assets
- $0.00
- Accounts payable
- $28,000.00
- Other current liabilities
- $12,000.00
0.38×
quick ratio
- Quick assets
- $15,000.00
- Current ratio
- 2.5×
- Working capital
- $60,000.00
The current ratio says assets cover the bills 2.5 times. Cash and receivables cover 15,000 ÷ 40,000 of each dollar due, which is 0.38×. Working capital is still $60,000, and 85,000 ÷ 100,000 = 85% of current assets is inventory. The acid test leaves that stock on the shelf.
Fig 2 · 1/2
Quick ratio beside the current ratio
Two series. Inventory is the gap between them.
Ratio
- Quick
- Current
| Category | Quick | Current |
|---|---|---|
| Default | 1.5 | 3 |
| Cafe | 1.9 | 2.1 |
| Stock | 0.4 | 2.5 |
| Service | 2.8 | 2.9 |
| Cash only | 2 | 2 |
Quick ratios. The stock-heavy shop is 0.38×.
Current ratios on the same books. That shop is 2.5×.
Example 4: what if that inventory becomes cash
Hold Example 1. Move the $90,000 of inventory into cash. Cash becomes 40,000 + 90,000 = $130,000. Inventory becomes $0. Receivables, other assets, and both liability lines stay put.
Current assets: 130,000 + 45,000 + 0 + 5,000 = $180,000.00
Current liabilities: still $60,000.00
Quick assets: 180,000 − 0 = $180,000.00
Quick ratio: 180,000 ÷ 60,000 = 3×
Current ratio: still 3×
Working capital: still $120,000.00
The current ratio did not move, because total assets did not move. The quick ratio rose from 1.5× to 3×. The entire change is the $90,000 leaving inventory: 90,000 ÷ 60,000 = 1.5, and 1.5 + 1.5 = 3. Selling the stock into cash is the event the acid test was waiting for. A sale on credit would land in receivables instead, and receivables stay inside quick assets, so the quick ratio would still rise to 3×.
Example 5: both ratios under 1
Inputs: cash $4,000, receivables $6,000, inventory $15,000, other assets $0, payables $18,000, other liabilities $12,000.
Current assets: 4,000 + 6,000 + 15,000 = $25,000.00
Current liabilities: 18,000 + 12,000 = $30,000.00
Quick assets: 25,000 − 15,000 = $10,000.00
Quick ratio: 10,000 ÷ 30,000 = 0.3333, shown as 0.33×
Current ratio: 25,000 ÷ 30,000 = 0.8333, shown as 0.83×
Working capital: 25,000 − 30,000 = −$5,000.00
Calculator result
Quick ratio
- Cash and equivalents
- $4,000.00
- Accounts receivable
- $6,000.00
- Inventory
- $15,000.00
- Other current assets
- $0.00
- Accounts payable
- $18,000.00
- Other current liabilities
- $12,000.00
0.33×
quick ratio
- Quick assets
- $10,000.00
- Current ratio
- 0.83×
- Working capital
- -$5,000.00
With inventory counted, the bills due this year are still larger than current assets by $5,000. Near-cash covers a third of them. The gap from quick assets to liabilities is 30,000 − 10,000 = $20,000.00. Inventory of $15,000 leaves $5,000 of that gap open.
Example 6: the mistake of skipping the inventory subtraction
Hold Example 1 and divide current assets by current liabilities: 180,000 ÷ 60,000 = 3×.
That is the current ratio. Calling it the quick ratio leaves the $90,000 of inventory in the numerator. The quick ratio is 90,000 ÷ 60,000 = 1.5×. The gap is 3 − 1.5 = 1.5×, which is 90,000 ÷ 60,000.
On Example 3 the same slip is louder. 100,000 ÷ 40,000 = 2.5× if inventory stays in. The acid test is 0.38×. You would report a cover and the near-cash lines hold $15,000 against $40,000 of bills.
Example 7: old receivables still count
The quick ratio treats every dollar of receivables as near cash. Example 1 includes $45,000. Suppose $30,000 of that book is 90 days old and you do not want it in the acid test.
The calculator has no age box. It still prints quick assets of $90,000.00 and a quick ratio of 1.5×.
Subtract the aged piece yourself: 90,000 − 30,000 = $60,000.00 of assets you are willing to call near cash. 60,000 ÷ 60,000 = 1×. The ratio falls from 1.5× to 1×, and it now matches the liabilities with nothing left over. The page will not show that 1× until those $30,000 leave the receivables box. Aging belongs on the invoices. The receivables turnover post is the collection speed of the whole book, not one late invoice.
Example 8: a service firm
Inputs: cash $55,000, receivables $40,000, inventory $2,000, other assets $3,000, payables $20,000, other liabilities $15,000.
Current assets: 55,000 + 40,000 + 2,000 + 3,000 = $100,000.00
Current liabilities: 20,000 + 15,000 = $35,000.00
Quick assets: 100,000 − 2,000 = $98,000.00
Quick ratio: 98,000 ÷ 35,000 = 2.8×
Current ratio: 100,000 ÷ 35,000 = 2.8571, shown as 2.86×
Working capital: 100,000 − 35,000 = $65,000.00
Inventory is 2% of current assets. The two ratios almost match. Receivables are 40,000 ÷ 98,000 = 40.8% of quick assets, so the 2.8× still depends on customers paying. Cash alone is 55,000 ÷ 35,000 = 1.57 times the liabilities.
Fig 3 · 1/3
What the current assets are made of
Cash and other current assets share a slice. Inventory is the piece the quick ratio drops.
Current assets
- Cash and other
- Receivables
- Inventory
| Category | Cash and other | Receivables | Inventory |
|---|---|---|---|
| Default | $45k | $45k | $90k |
| Cafe | $23k | $3.0k | $4.0k |
| Stock | $6.0k | $9.0k | $85k |
| Service | $58k | $40k | $2.0k |
The default book is $180,000, and half of it is inventory.
The service firm is $100,000, with $2,000 of inventory.
Example 9: what if payables rise by $20,000
Hold Example 1. Change accounts payable from $35,000 to $55,000. Every asset line stays put.
Current assets: still $180,000.00
Current liabilities: 55,000 + 25,000 = $80,000.00
Quick assets: still $90,000.00
Quick ratio: 90,000 ÷ 80,000 = 1.125, shown as 1.13×
Current ratio: 180,000 ÷ 80,000 = 2.25×
Working capital: 180,000 − 80,000 = $100,000.00
The quick ratio falls from 1.5× to 1.13×. It is still above 1. Working capital falls from $120,000 to $100,000, a drop of $20,000, the same amount as the new bill. Another $10,000 of payables would put liabilities at $90,000 and the quick ratio at 90,000 ÷ 90,000 = 1×. The asset side did not get worse. The bills did.
Example 10: cash only, and the prepaid that stays in
Cash only. Inputs: cash $24,000, receivables $0, inventory $0, other assets $0, payables $8,000, other liabilities $4,000.
Current assets: $24,000.00
Current liabilities: 8,000 + 4,000 = $12,000.00
Quick assets: $24,000.00
Quick ratio: 24,000 ÷ 12,000 = 2×
Current ratio: 2×
Working capital: 24,000 − 12,000 = $12,000.00
With no inventory, the two ratios are the same number. Cash covers the bills twice.
Now a book that looks liquid because of a prepaid. Inputs: cash $10,000, receivables $5,000, inventory $20,000, other assets $45,000, payables $15,000, other liabilities $10,000.
Current assets: 10,000 + 5,000 + 20,000 + 45,000 = $80,000.00
Current liabilities: 15,000 + 10,000 = $25,000.00
Quick assets: 80,000 − 20,000 = $60,000.00
Quick ratio: 60,000 ÷ 25,000 = 2.4×
Current ratio: 80,000 ÷ 25,000 = 3.2×
Working capital: 80,000 − 25,000 = $55,000.00
The formula subtracts inventory. The $45,000 of other current assets stays in the quick ratio. A prepaid insurance bill is still in that $45,000. Pull it out as well and the assets you would spend are 60,000 − 45,000 = $15,000, and 15,000 ÷ 25,000 = 0.6×. The page keeps printing 2.4× while those dollars sit in the other-assets box. Move them out of that box when they cannot pay a bill this year.
Fig 4 · 1/5
Quick assets on five snapshots
Inventory is already out. Liabilities are not in this chart.
Quick assets
Default
$90,000
Cafe
$26,000
Stock-heavy
$15,000
Shortfall
$10,000
Service
$98,000
The default quick assets are $90,000.
The service firm is $98,000. The shortfall snapshot is $10,000.
The ten results side by side
| Example | Quick assets | Liabilities | Quick | Current | Working capital |
|---|---|---|---|---|---|
| 1. Defaults | $90,000 | $60,000 | 1.5× | 3× | $120,000 |
| 2. Cafe | $26,000 | $14,000 | 1.86× | 2.14× | $16,000 |
| 3. Stock-heavy | $15,000 | $40,000 | 0.38× | 2.5× | $60,000 |
| 4. Inventory to cash | $180,000 | $60,000 | 3× | 3× | $120,000 |
| 5. Both under 1 | $10,000 | $30,000 | 0.33× | 0.83× | −$5,000 |
| 6. Inventory left in | $180,000 typed as quick | $60,000 | 3× called quick | 3× | $120,000 |
| 7. $30,000 aged, off to the side | $60,000 | $60,000 | 1× beside the page | 3× | $120,000 |
| 8. Service | $98,000 | $35,000 | 2.8× | 2.86× | $65,000 |
| 9. Payables up $20,000 | $90,000 | $80,000 | 1.13× | 2.25× | $100,000 |
| 10. Cash only | $24,000 | $12,000 | 2× | 2× | $12,000 |
| 10. Prepaid left in | $60,000 | $25,000 | 2.4× | 3.2× | $55,000 |
Example 6 reports the current ratio in the quick ratio’s place. Example 7 is an age adjustment you do beside the page, which has no age box. Example 10’s prepaid stays in because the formula removes inventory only.
Read the quick ratio, then the current ratio, then working capital. A 2.5× current ratio with a 0.38× quick ratio is a stock question. A 0.83× current ratio is a bills question even before inventory comes out. Loan payments against operating income are a different test, the debt service coverage post.