Quick Ratio
Also known as SaaS Quick Ratio, Acid-Test Ratio, Growth Efficiency Ratio
Quick ratio has two distinct meanings. In accounting it is (current assets minus inventory) divided by current liabilities, measuring short-term liquidity. In SaaS it is (new MRR plus expansion MRR) divided by (churned MRR plus contraction MRR), measuring how much new revenue is added for each dollar lost.
Formula
SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)- New MRR
- Recurring revenue added from net-new customers in the period
- Expansion MRR
- Recurring revenue added from existing customers (upsell, seat expansion, upgrades)
- Churned MRR
- Recurring revenue lost from customers who fully cancelled
- Contraction MRR
- Recurring revenue lost from existing customers who downgraded or reduced seats
In depth
The term quick ratio points to two different formulas. The older meaning is the acid-test ratio from financial accounting: (current assets minus inventory) divided by current liabilities. It measures whether a company can settle short-term obligations using only liquid assets. A ratio above 1.0 means the company can cover its near-term liabilities without selling inventory.
The SaaS quick ratio is a different concept entirely. Mamoon Hamid, then at Social Capital, defined it as the ratio of new and expansion MRR to churned and contraction MRR over the same period. It answers a different question: for every dollar of recurring revenue the business is losing, how many dollars is it gaining. A ratio of 4 means the company adds $4 of new and expanded MRR for each $1 lost to churn and contraction. The accounting and SaaS versions are unrelated except by name.
Why it matters
The SaaS quick ratio surfaces a problem that growth rate alone hides. A company growing 100% year-over-year can still have a structurally weak quick ratio if half its new MRR is offset by churn and contraction, signalling a leaky bucket. Social Capital used a quick ratio below 4 as a disqualifier for enterprise SaaS investment. The threshold has loosened in market data since then, but the framework remains a fast way to detect retention problems that ARR growth obscures.
Worked example
A SaaS company's monthly recurring revenue movements:
| Component | MRR change |
|---|---|
| New MRR | +$180K |
| Expansion MRR | +$60K |
| Churned MRR | -$45K |
| Contraction MRR | -$15K |
SaaS Quick Ratio = ($180K + $60K) / ($45K + $15K)
= $240K / $60K
= 4.0x
The company sits exactly at the 4.0x Social Capital threshold: every dollar of MRR lost is offset by four dollars of new or expanded MRR. If churn doubles to $90K next quarter, the ratio compresses to $240K / $105K = 2.3x, and the company moves from efficient to merely sustainable growth.
Frequently asked
Which quick ratio do investors mean in a SaaS context?
Almost always the SaaS quick ratio coined by Mamoon Hamid at Social Capital. The accounting acid-test ratio is rarely cited in venture diligence because most SaaS companies do not carry meaningful inventory or short-term debt. When a VC asks for 'quick ratio' on a SaaS deal, they mean (new + expansion MRR) / (churn + contraction MRR).
What is a good SaaS quick ratio?
Hamid set the threshold at 4.0 for Social Capital underwriting: $4 of new and expansion MRR for each $1 of churn and contraction. Wall Street Prep summarizes the working bands as below 1.0 poor (churn offsets growth), 1.0 to 4.0 average (efficiency exists but is limited), and above 4.0 strong growth efficiency.
How does quick ratio differ from net dollar retention?
NDR measures revenue change inside the existing customer base only. Quick ratio includes new customer acquisition in the numerator, so it captures growth efficiency across both new and existing books. A company can have NDR above 100% (expansion outpaces churn) and still have a poor quick ratio if new logo acquisition is weak.
Is the accounting quick ratio still relevant?
Yes for credit-driven and capital-intensive businesses. Lenders and CFOs use it to test whether a company can pay short-term obligations without selling inventory. For software companies it is usually too high to be informative because there is no inventory to back out.