A company's current liabilities are the items that are payable within the next year, such as short-term loans. You can calculate a company's quick ratio to determine its ability to cover these payments using the quick assets it has on hand. Quick assets include cash and those that will soon become cash. A company with a quick ratio of at least 1 has sufficient quick assets to cover its current liabilities. A ratio of less than 1 suggests the company must generate other funds, such as by selling inventory, to pay its bills.
Obtain a company's most recent balance sheet. If you want to calculate a quick ratio for a public company, find its balance sheet in its Form 10-Q quarterly report or in its Form 10-K annual report. You can download Forms 10-Q and 10-K from the investor relations section of a company's website or from the U.S. Securities and Exchange Commission's online EDGAR database.
Identify the amount of cash, marketable securities, accounts receivable, interest receivable and current notes receivable in the current assets section of the balance sheet. Add these items together to determine the company's total quick assets. For example, assume a company has $1 million in cash, $2 million in marketable securities, $4 million in accounts receivable and $1 million in interest receivable. Add these to get $8 million in quick assets.
Find the amount of accounts payable, short-term loans, interest payable and any other items in the current liabilities section of the balance sheet. Add these items together to determine the company's total current liabilities. Continuing the example, assume the company has $1.5 million in accounts payable, $2 million in short-term loans and $500,000 in interest payable. Add these together to get $4 million in total current liabilities.
Divide the company's quick assets by its current liabilities to calculate its quick ratio. Concluding the example, divide $8 million by $4 million to get a quick ratio of 2. This means the company has quick assets equal to twice its current liabilities, which suggests it can easily cover its short-term payments.
Calculate a company’s quick ratio for different periods to spot any positive or negative changes.
A low quick ratio doesn’t necessarily mean a company is in trouble. A company might generate strong cash flows or be able to raise additional money to pay its current liabilities.